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OUR  MONEY  AND 
THE  STATE 


BY  HARTLEY  WITHERS 


Life  is  like  playing  a  violin  solo  in  public 
and  learning  the  instrument  as  one  goes  on. 

Sa3£XJEL  Btjtlee,  Essays  on  Life,  Art  and  Science 


NEW  YORK 

E.  P.  DUTTON  &  COMPANY 

68i  FIFTH  AVENUE 


Copyright,  1917 
B.   E.  P.  EUTTON  &  COMPANY 


\ 


printed  in  the  Qnited  States  of  Hmerica 


H  ^ 


^ 

(? 


PREFACE  TO  THE  AMERICAN  EDITION 

Problems  of  Public  Finance  are  looked  at  from  dif- 
ferent angles  by  different  peoples,  but  are,  in  es- 
sence, much  the  same  all  over  the  world.     More- 
over it  is  possible  that  if  the  present  war  ends  in  the 
establishment  of  a  League  of  Peace,  based  on  the 
brotherhood  of  Mankind,  as  foreshadowed  by  Presi- 
dent Wilson  in  his  noble  message  to  the  Russian 
people,  there  may  be  a  change  in  the  outlook  on 
questions  of  taxation,  and  they  may  be  hencefor- 
ward looked  at  from  a  new  point  of  view,  directed 
to  the  furtherance  of  that  brotherhood.     In  any 
J  case,  since  one  of  the  benefits  that  the  people  of  the 
J  United  States  have  always  enjoyed  is  the  power  to 
J  profit  by  the  mistakes  of  Europe,  it  is  possible  that 
Oy  an  English  view  of  the  relations  between  the  State 
\  and  the  property  of  its  citizens  may  be  of  some  in- 
terest in  America. 

Hartley  Withers. 

July  191 7. 


389193 


PREFACE  TO  THE  ENGLISH  EDITION 

This  book  grew  out  of  a  course  of  lectures  on  Public 
Finance  delivered  at  the  London  School  of  Econo- 
mics in  February  and  March.  The  subject  had 
already  been  dealt  with  ably  and  fully  by  writers 
who  had  made  a  special  study  of  it;  but  the 
present  war,  by  making  us  spend  with  such  titanic 
recklessness,  has  supplied  us  with  a  huge  magnifying 
glass,  by  which  cause  and  effect  are  more  clearly  seen 
than  in  times  of  peace.  The  results  of  borrowing, 
inflation  of  currency,  and  inequities  in  taxation  are 
seen  at  work  now  on  such  a  scale  that  if  we  use  the 
experiences  of  the  war  aright  they  may  help  us  to 
better  financial  methods  when  the  war  is  over. 
Students  who  wish  to  pursue  the  subject  into  its 
technical  and  scientific  details  can  do  so  with  the 
help  of  Public  Finance,  by  Prof.  Bastable;  The 
Income  Tclx,  and  other  works  on  taxation  by  Prof. 
Edwin  R.  A.  Seligman;  British  Budgets,  1887-1913, 
by  Sir  Bernard  Mallet;  The  System  of  National 
Finance,  by  Mr.  E.  Hilton  Young,  M.P. ;  The 
Financial  System  of  the  United  Kingdom,  by  H. 
Higgs,  C.B. ;  and  that  monument  of  industry  and 
mine  of  statistical  and  other  information,  the  House 
of  Commons  Return  (366)  of  1869,  on  Public  In- 

vii 


viii  PREFACE  ' 

come  and  Expenditure,  etc.,  drawn  up  in  years  of 
patient  labour  by  Henry  W.  Chishohn,  sometime 
Chief  Clerk  of  the  Exchequer :  it  is  commonly  called 
Chisholm's  Analysis  of  the  Public  Accounts,  1688 — 
1869. 

Hartley  Withers. 
6,  Linden  Gardens, 
June  191 7. 


CONTENTS 


CHAPTER  I 

PAGE 

THE   OBJECTS  OF  GOVERNMENTAL   SPENDING  I 

Government  spends  to  secure  property  of  citizens, 
to  defend  national  honour,  to  increase  country's 
material  resources  and  promote  national  health — 
Government's  theoretical  right  to  take  all  citizens' 
property  modified  by  practical  inability — Change  in 
view  as  to  governmental  activity — Spencer — Huxley 
— Adam  Smith. 


CHAPTER  II 

MONEY  TAKEN   BY  BORROWING      ....         25 

Borrowing  popular  owing  to  belief  that  it  makes 
posterity  pay — This  belief  delusive — War  paid  for 
while  it  goes  on — Borrowing  only  affects  distribution 
of  posterity's  income — Borrowing  at  home — Its 
drawbacks — Borrowing  abroad. 


CHAPTER  III 

MONEY  WATERED   BY  INFLATION  ....  $2 

Medieval  debasement  of  currency — Modem  infla- 
tion— Methods  by  which  currency  is  increased — Why 
it  happens — Evil  effects. 


X  CONTENTS 

CHAPTER  IV 

FAOB 

MONEY  TAKEN  BY  TAXATION 73 

Does  money  left  with  citizens  always  ' '  fructify  "  ? — 
Adam  Smith's  maxims — Walker's  criticism — Gradu- 
ation and  differentiation — The  ideal  income  tax — 
Unfairness  of  indirect  taxes — Import  duties. 


CHAPTER  V 

THE  LIMITS   OF  GOVERNMENTAL  SPENDING    .       105 

Can  the  State  earn  revenue  by  trade  enterprise? — 
Fabian  scheme — Imperial  Committee's  proposal — 
Adverse  experiences — Limits  to  taxation — Willing- 
ness of  taxpayers  essential. 


OUR  MONEY  AND  THE  STATE 


OUR  MONEY  AND  THE  STATE 

CHAPTER  I 

THE   OBJECTS   OF    GOVERNMENTAL    SPENDING 

Why  does  the  Government  take  our  money?  Be- 
cause government  costs  money,  and  cannot  be  had 
without  it.  Taxation  is  the  price  that  we  pay  for 
government  and  protection.  Most  of  us  do  not 
want,  or  need,  to  be  governed  ourselves.  Respect 
for  law,  or  for  the  duties  and  customs  that  law 
embodies,  is  so  engrained  in  us  by  centuries  of 
tradition,  that  the  presence  of  the  policeman  on  his 
beat  is  a  fact  that  never  influences  our  conduct. 
But  if  we  do  not  need  to  be  governed  ourselves,  we 
very  much  need  other  people  to  be  governed  and 
prevented  from  attacking  us  or  our  belongings. 
Protection  of  our  persons  and  property,  from  home 
and  foreign  foes,  is  the  first  and  most  important 
business  of  government ;  and  the  chief  reason  that 
it  can  give  if  we  ask  it  "Why  should  we  pay  taxes?" 
is  this:  "Because,  if  you  don't,  you  will  be  in  dan- 
ger of  losing  everything  that  you  have  got." 

Government  does  so  much  in  these  days  besides 
its  first  elementary  task  of  protecting  us  from  one 


2       THE  OBJECTS  OF  SPENDING       [chap. 

another  and  from  outward  foes,  that  we  are  apt  to 
forget  that  this  is  its  original  business.  But  as  the 
point  is  very  important,  as  we  shall  see  later,  it 
is  well  to  get  it  fixed  into  our  heads  by  reading 
the  plain  words  in  which  it  is  set  forth  by  John 
Locke.  In  Chapter  I  of  his  Essay  concerning  the 
True  Original  Extent  and  End  of  Civil  Govern- 
ment he  says : 

"Political  Power  then  I  take  to  be  a  Right  of 
making  Laws  with  Penalties  of  Death,  and  conse- 
quently all  less  Penalties,  for  the  regulating  and 
preserving  of  Property,  and  of  employing  the  Force 
of  the  Community  in  the  Execution  of  such  Laws, 
and  in  the  Defence  of  the  Commonwealth  from 
Foreign  Injury,  and  all  this  only  for  the  Publick 
Good." 

In  Chapter  VIII  of  the  same  Essay  we  find : 

"The  only  Way  whereby  any  one  divests  himself  of 
his  natural  Liberty  and  puts  on  the  Bonds  of  civil 
Society,  is  by  agreeing  with  other  men  to  join  and 
unite  into  a  Community,  for  their  comfortable,  safe, 
and  peaceable  living  amongst  one  another,  in  a  secure 
Enjoyment  of  their  Properties,  and  a  greater  Security 
against  any  that  are  not  of  it." 

And  in  Chapter  IX  the  matter  is  summed  up  thus : 

"The  great  and  chief  End  therefore,  of  Mens 
uniting  into  Commonwealths  and  putting  them- 
selves under  Government,  is  the  Preservation  of  their 
Property." 

Locke  did  not  leave  the  object  of  government  on 


I]  THE  STATE'S  CLAIM  3 

this  merely  businesslike  foundation.  He  did  not 
really  mean  that  we  only  submit  to  being  governed 
in  order  that  we  may  grow  rich  and  fat  and  enjoy 
our  riches  without  fear  of  burglars  or  marauding 
foes.  He  says  in  another  passage  that  the  End  of 
Government  is  the  Good  of  Mankind.  This  is  a 
more  inspiring  ideal,  but  we  shall  all  acknowledge 
that  it  cannot  be  secured  unless  man's  material  wants 
are  satisfied,  and  that  as  society  is  at  present  con- 
stituted, this  cannot  be  done  unless  property  is  pro- 
tected. Some  day  mankind  will  perhaps  grow 
into  a  race  of  beings  who  will  work  for  the  pleasure 
of  working,  and  not  mind  who  takes  and  uses  the 
stuff  that  they  make  and  grow.  There  are  already 
many  more  of  such  people  than  old-fashioned  econ- 
omists admit.  But  in  considering  present-day  prob- 
lems, we  have  to  take  human  nature  as  it  is,  and 
nations  cannot  at  present  increase  their  wealth,  and 
so  their  power  to  secure  the  Good  of  Mankind, 
unless  those  who  increase  it  are  secured  in  the  en- 
joyment of  it. 

Protection  of  the  property  of  the  citizens  being 
thus  the  original,  and  still  a  very  important,  duty  of 
the  State,  it  follows  that  the  State,  in  order  to 
carry  it  out,  can  make  any  claims  that  it  pleases  on 
the  services  and  property  of  the  citizens.  The  State, 
as  Professor  Bastable  tells  us,  "is  entitled  to  claim 
all  the  services  and  property  of  its  subjects  for  the 
accomplishment  of  whatever  aims  it  prescribes  to 
itself.  When  stated  in  so  rigid  a  form,"  he  adds, 
"the  proposition  is  likely  to  awaken  dissent,  and  yet, 


4       THE  OBJECTS  OF  SPENDING       [chap. 

from  the  strictly  legal  and  administrative  point  of 
view,  it  is  a  commonplace  since  the  time  of  Austin,"^ 
(Austin  was  a  great  authority  on  law,  who  lived  and 
wrote  in  the  first  half  of  the  nineteenth  century.) 
It  is  true  enough,  as  Professor  Bastable  suggests, 
that  the  average  British  paterfamilias  may  be 
startled  into  an  indignant  denial  of  the  great  law 
that  the  State  has  a  right  to  take  all  his  work  and 
all  his  goods.  But  a  few  moments'  thought  would 
convince  him  that  the  proposition  is  quite  sound 
in  logic,  since  the  State  cannot  do  its  business  if 
all  the  citizens  are  to  be  able  to  decide  how  much, 
or  how  little,  they  are  to  give,  in  work  or  in  goods, 
to  its  support;  and  he  would  also  comfort  himself 
with  the  reflection  that,  however  logical  be  this 
power  of  the  State,  it  cannot  be  exercised  beyond  a 
certain  point.  On  papefTltHe  State  may  be  able  to 
set  us  all  to  work  for  it,  but  it  cannot  make  us 
work  hard  or  well  unless  we  are  willing  to  do  so. 
On  paper,  the  State  may  be  able  to  take  all  our 
property,  but  if  it  did,  then  it  would  not  be  worth 
any  one's  while  to  get  property^  The  citizens  would 
cease  to  accumulate  property,  that  is,  to  leave  the 
world  richer  than  they  found  it.  Either  the  State 
would  have  to  accumulate  on  its  own  account,  which 
it  could  only  do  if  the  citizens  were  willing  to  work 
for  it,  or  it  would  find  that  it  had  come  to  a  stand- 
still. 

Professor   Bastable's   proposition,   though   abso- 
lutely true  as  a  principle,  is  thus  modified  by  the 
'^  Public  Finance,  p.  42. 


/ 


I]  TAXPAYERS'  STRIKE  5 

very  real  power  of  the  citizen  to  refuse  to  produce 
either  the  work  or  the  property  that  the  State  has 
the  power  to  take.  This  power  of  the  overtaxed 
citizen  to  strike  effectively  against  taxation  is  no 
fanciful  suggestion  of  what  might  possibly  happen. 
It  has  happened.  Under  the  Roman  Empire  taxa- 
tion was  enormously  heavy,  for  the  support  of  the 
Army,  the  Imperial  Court,  and  "the  great  number 
of  clerks  made  necessary  by  the  bureaucratic  form 
of  government."  It  was  also  extremely  oppressive, 
since  the  senatorial  class,  the  Army,  Professors  of 
Rhetoric,  and  the  Clergy,  were  largely  freed  from  it, 
and  so  the  whole  burden  fell  on  the  curials,  that  is, 
owners  of  twenty-five  acres  of  land,  or  its  equivalent. 

"When  the  curials  were  bankrupt  and  could  no 
longer  pay  the  taxes,  they  attempted  in  every  way 
to  escape  from  their  class.  Some  of  them  succeeded 
in  rising  into  the  senatorial  ranks ;  many  of  them 
deserted  their  lands  and  became  slaves,  or  entered  the  C  JJ 
Army  or  the  Church.  The  Emperors,  trymg  to  pre- 
vent this,  often  seized  the  curial  who  had  run  away 
and  compelled  him  to  take  up  his  old  burden 
again."  2  '^ 

This  fact,  of  the  taxpayers'  power  to  strike,  is 
very  relevant  to  modern  problems  of  finance,  be- 
cause it  may  come  into  play  long  before  there  is 
any  question  of  the  State's  taking  the  whole  of  our 
goods.  As  soon  as  the  pressure  of  taxation  begins 
to  be  heavy,  the  danger  has  to  be  ever  present  in 
/  M  General  History  of  Europe  (350-1900),  by  Thatcher  and  / 
Schwill,  pp.  9-10. 


6       THE  OBJECTS  OF  SPENDING       [chap. 

the  mind  of  the  statesman  who  is  responsible,  that 
he  may,  by  his  present  exactions,  be  preventing  the 
future  growth  of  the  country's  wealth,  and  so 
making  the  task  of  his  successors  difficult,  if  not 
impossible.  Taxation  that  is  resented,  beyond  a 
certain  point,  will  be  evaded  or  avoided.  The  tax- 
gatherer  can  only  work  to  his  own  satisfaction  if  he 
carries  the  sense  of  the  taxpayers  with  him.  Hence 
it  is  of  the  utmost  importance,  not  only  that  our 
rulers  should  tax  well,  but  that  the  citizens  should 
understand  about  taxation,  recognize  it  as  good 
when  it  is  good,  and  pay  it  cheerfully  when  it  is 
equitable  and  well  distributed. 

"All  taxes  are  confiscation,"  said  Mr.  Joseph 
Hume  in  the  House  of  Commons  in  1833.^  In  the 
original  sense  of  the  word  confiscation,  which  meant 
"putting  into  the  Treasury,"  this  is  clearly  a  plati- 
tude. But  as  it  now  is  generally  taken  to  mean  an 
arbitrary  appropriation,  these  words  sum  up  a  fal- 
lacy about  taxation  which  has  to  be  exorcised  and 
expelled  before  the  fiscal  arrangements  of  any  nation 
can  be  comfortable  either  for  the  taxer  or  the 
taxed.  In  fact,  taxation  is,  or  ought  to  be,  the 
i  process  by  which  the  State  takes  money  from  us, 

-^  in  proportion  to  our  ability  to  pay,  to  spend  on  the 

defense  of  our  property  from  home  or  foreign 
enemies,  on  the  defense  of  the  national  honor,  if 
need  be,  on  the  increase  of  the  material  and  other 
resources  of  the  country,  and  on  the  public  health. 

If  this  be  a  true  description  of  taxation,  taxation 
*  Seligman,  The  Income  Tax,  p.  122; 


I]  GOOD  TAXATION  PAYS  7 

is  a  process  to  which  we  must  all  submit  gladly. 
All  the  objects  for  which  the  money  so  taken  from 
us,  with  one  exception,  will  literally  pay  us,  if  they 
are  carried  out.  That  exception  is  the  defense  of 
the  national  honor,  and  he  would  be  a  craven  skin- 
flint who  would  grudge  money  well  spent  on  that. 
Defense  of  our  property  clearly  pays  us.  So  does 
the  increase  of  the  country's  resources,  because  it 
will  make  the  burden  of  taxation  lighter.  If  our 
particular  income  does  not  increase,  but  that  of 
others  does,  and  if  taxation  is  taken  in  proportion 
to  our  ability  to  pay,  we  shall  have  to  pay  less  in 
proportion.  Public  health  pays  us  because  it  les- 
sens infectious  and  contagious  disease,  and  so  keeps 
down  our  doctors'  bills. 

But  if  this  description  of  taxation  be  untrue,  it 
is  our  business  to  make  it  true,  and  this  can  only  be 
done  if  everybody  gives  careful  thought  to  the 
matter,  so  that  if  our  rulers  make  mistakes,  there 
shall  be  a  strong  body  of  well-informed  opinion  to 
criticize  and  correct  them ;  and  also  so  that  we  may 
learn  that  it  is  not  the  object  of  every  citizen  to 
pay  as  little  in  taxes  as  possible,  because  if  that 
spirit  is  abroad,  the  fiscal  machinery  of  the  country 
will  never  run  smoothly  and  well ;  we  have  to  learn 
to  judge  whether  taxes  are  fair  from  the  point  of 
view  of  the  nation  as  a  whole,  and  when  we  rec- 
ognize them  as  fair,  to  pay  them  gladly  and  readily. 
In  time  of  war  this  readiness  to  pay  is  pro- 
duced, sometimes,  by  patriotic  enthusiasm.  In  the 
early   days   of   the  present   war,   taxpayers   wrote 


8       THE  OBJECTS  OF  SPENDING       [chap. 

to  the  British  Chancellor  of  the  Exchequer  express- 
ing the  pleasure  with  which  they  paid  income  tax. 
If  we  could  be  sure  that  money  taken  in  taxes  was 
taken  fairly,  and  used  well  for  the  national  benefit, 
that  pleasure  ought  at  all  times  to  be  present  when 
we  pay  it. 

It  has  been  said  that  a  nation  gets  the  Govern- 
ment that  it  deserves,  and  Public  Finance  is  cer- 
tainly a  department  in  which  the  pressure  of  enlight- 
ened public  opinion  can  do  much.  But  we  shall 
never  learn  to  get  our  Public  Finance  on  a  sound 
and  businesslike  basis  until  we  understand  our  own 
domestic  expenditure  better.  When  we  recognize 
the  responsibility  that  is  attached  to  the  use  of  our 
own  money,  we  shall  be  able  to  begin  to  see  that 
our  rulers  make  good  use  of  the  money  of  the 
nation.  As  long  as  there  is  a  common  tendency 
among  the  citizens  to  waste  their  incomes  on  frip- 
peries and  vulgarities  in  obedience  to  fashion  and 
convention,  and  to  invest  their  savings  in  wild-cat 
speculations  in  the  hope  of  getting  wealth  without 
trouble,  we  need  not  expect  the  national  finances 
to  be  as  well  husbanded  as  they  might  be.  The 
sum  of  the  national  wisdom,  in  finance  as  in  other 
things,  may  be  a  little  greater  than  the  aggregate 
wisdom  of  all  the  citizens,  but  cannot  lead  it  by 
much. 

Going  back  to  our  description  of  what  taxation 
is,  or  ought  to  be,  we  see  at  once  that  even  if  every 
one  were  to  agree  to  it  as  stated,  there  are  several 
expressions   in  it  about  which  agreement   is  not 


I]  HERBERT  SPENCER'S  VIEW  9 

likely  to  be  reached  as  long  as  the  present  frame- 
work of  society  stands.  In  the  first  place,  the  ques- 
tion of  ability  to  pay  is  full  of  pitfalls  and  difficul- 
ties which  will  be  discussed  in  a  later  chapter.  First 
of  all,  we  have  to  try  to  get  something  like  a  clear 
conclusion  about  the  objects  on  which  the  State 
is  entitled  to  spend  our  money,  when  it  has  taken 
'^it,  and  on  this  there  has  been,  is,  and  always 
will  be,  a  good  deal  of  divergence  of  opinion.  As 
stated  above,  and  with  reservations  and  restrictions 
to  be  noted  later,  I  venture  to  think  that,  in  these 
days,  most  taxpayers  would  give  at  least  a  hesi- 
tating and  guarded  consent  to  the  scope  of  State 
expenditure.  But  there  was  a  time  when  it  would 
have  been  thought  to  be  much  too  wide,  and  many 
people  now  will  think  it  much  too  narrow.  The  via, 
media  is  a  dull  and  unromantic  path,  but  it  has  a 
certain  safety. 

Herbert  Sgencer  may  be  taken  as  an  extreme 
exarnpTe  of  those  who  would  limit  the  spending  of 
the  State.  To  him  it  seemed  that  the  State  should 
spend  nothing  except  on  public  justice  and  defense. 
He  was  the  uncompromising  apostle  of  personal 
freedom,  and  he  believed  that  only  through  it  could 
progress  and  development,  of  the  individual  and  of 
the  nation,  best  be  achieved.  He  had  an  uncon- 
querable objection  to  anything  like  discipline  or 
government,  so  strong  that,  when  a  lad  of  thirteen, 
he  walked  home  from  Bath  to  Derby  rather  than 
stay  at  school.  He  walked  forty-eight  miles  in  one 
day,  forty-seven  on  the  second,  and  twenty-five  on 


10     THE  OBJECTS  OF  SPENDING       [chap. 

the  third,  without  sleep,  and  with  very  little  food.* 
In  his  youth  he  did  not  even  admit  that  the  Govern- 
ment should  spend  money  on  external  defense. 
Either  he  believed  that  a  mercenary  army  and  navy, 
hired  by  private  subscription,  would  suffice  to  keep 
out  enemies,  or  else  he  took  the  extreme  pacifist 
view  that  an  unarmed  nation  need  not  fear  attack. 
But,  in  his  later  years,  he  abandoned  this  view, 
and  admitted  national  defense  as  a  proper  object 
of  government  expenditure.  He  still,  however, 
thought  that  the  Postal  Service  would  have  been 
much  more  cheaply  and  efficiently  managed  if  it 
had  been  left  to  private  enterprise,  which  is  quite 
possibly  true,  though  it  is  hardly  likely  that  postal 
facilities  would  have  been  so  well  distributed.  He 
"advanced  the  doctrine  that,  as  we  trust  the  grocer 
to  furnish  us  with  pounds  of  tea,  and  the  baker  to 
send  us  loaves  of  bread,  so  we  might  trust  Heaton 
&  Sons  or  some  of  the  other  enterprising  firms  of 
Birmingham  to  supply  us  with  sovereigns  and  shil- 
lings at  their  own  risk  and  profit."^  He  even  con- 
tended that  sanitation  was  not  a  proper  object  of 
collective  activity,  and  records  with  obvious  pleasure 
how  the  early  efforts  at  drainage,  being  defective, 
sometimes  produced  disease*  It  need  not_be  said 
that  education  was  a  matter  which  every  citizen 
should,  and  could  best,  provide  for  himself  or  his 
children.  He  is  never  tired  of  laughing  at  our  belief 
in  the  power  of  the  State  to  do  anything. 

*  Herbert  Spencer,  by  Hugh  Elliot. 

"  Money  and  the  Mechanism  of  Exchange,  Jevons,  p.  64. 


I]  HERBERT  SPENCER'S  VIEW  ii 

"Conceiving  [he  says],  the  State-agency,  as  though 
it  were  something  more  than  a  cluster  of  men 
(a  few  clever,  many  ordinary,  and  some  decidedly 
stupid),  v^^e  ascribe  to  it  marvellous  powers  of  doing 
multitudinous  things  which  men  otherwise  clus- 
tered are  unable  to  do.  We  petition  it  to  procure 
for  us  in  some  way  which  we  do  not  doubt  it  can 
find,  benefits  of  all  orders;  and  pray  it  with  un- 
faltering faith  to  secure  us  from  every  fresh  evil. 
Time  after  time  our  hopes  are  balked.  The  good 
is  not  obtained,  or  something  bad  comes  along  with 
it;  the  evil  is  not  cured,  or  some  other  evil  as  great 
or  greater  is  produced.  .  .  .  This  emotion  which  is 
excited  by  the  forms  of  governmental  power,  and 
makes  governmental  power  possible,  is  the  root  of 
a  faith  that  springs  up  afresh  however  often  cut 
down.  To  see  how  little  the  perennial  confidence 
it  generates  is  diminished  by  perennial  disappoint- 
ment, we  need  but  remind  ourselves  of  a  few  State 
performances  in  the  chief  State  Departments."  ® 

He  then  proceeds  to  give  several  examples  of 
administrative  ineptitude,  the  most  tragical  and 
absurd,  perhaps,  of  which  was  the  fact  that  it  took 
two  centuries  (1593  to  1795)  for  the  British  Admi- 
ralty to  adopt  the  use  of  lemon- juice  as  a  protection 
for  the  crews  of  its  warships  against  scurvy. 

"And  what  [he  asks]  has  been  the  effect  of  this 
amazing  perversity  of  officialism?  The  mortality 
from  scurvy  during  this  long  period  had  exceeded 
the  mortality  by  battles,  wrecks,  and  all  casualties 
of  sea-life  put  together!" 

*  Study  of  Sociology,  ch.  vii,  p.  160. 


12     THE  OBJECTS  OF  SPENDING        [chap. 

Such  an  example  of  a  waste  of  gallant  lives  by 
the  imperyiousness  of  the  official  mind  to  new  ideas 
goes  a  long  way  towards  proving  Spencer's  conten- 
tion that  Governments,  or  some  Governments,  are 
not  as  capable  as  private  individuals  or  companies  of 
doing  anything  which  can,  on  other  grounds,  be  left 
to  the  latter.  And  we  need  not  turn  back  over  the 
pages  of  ancient  history  to  find  such  examples  of 
departmental  fatuity.  During  this  very  war  there 
has  been  plenty  of  them  in  England,  though  we  may 
hope  that  loss  of  the  lives  of  her  fighters  has  not 
been  thus  criminally  involved. 

But  when  all  this  is  admitted,  there  are  still  sev- 
eral things  to  be  said  on  the  other  side  of  the  ques- 
tion. A  nation  in  which  governmental  action  has 
long  been  restricted  and  resented  must  not  complain 
too  loudly  if  the  Government,  when  it  is  suddenly 
told  to  do  things,  does  them  badly.  In  countries 
where  a  trained  bureaucracy  has  long  been  encour- 
aged to  do  much,  its  efforts  are  likely  to  compare 
better  with  those  of  private  enterprise.  The  effi- 
ciency of  the  German  governmental  machine  is  prob- 
ably much  exaggerated;  but  any  one  who  travelled 
on  the  German  State-owned  railways  had  no  reason 
to  complain  of  their  comfort  or  of  their  punctuality. 
In  those  respects  they  seemed  to  me,  from  a  certainly 
very  limited  experience,  to  compare  well  with  Eng- 
land's much-vaunted  railway  system,  which,  in  some 
respects,  was  unquestionably  a  disgrace  to  private 
enterprise.  Any  one  who  travelled  much  on  Sundays 
on  the  suburban  lines  of  England's  leading  railways 


I]  THE  OTHER  SIDE  13 

cannot  have  failed  to  marvel  at  the  utter  contempt 
for  public  convenience  with  which  they  conducted 
their  service.  They  stimulated  the  public  desire  to 
travel  by  cheap  tickets — I  am  speaking,  of  course, 
of  days  before  the  war — but  made  no  attempt  to 
provide  accommodation  for  it;  a  few  slow  trains, 
disgracefully  unpunctual  and  more  disgracefully 
overcrowded,  were  the  only  means  afforded  to  jaded 
Londoners  who  sought  for  a  few  hours  of  fresh  air 
on  the  day  of  rest.  Why  the  public  submitted  to 
it  was  a  mystery.  If  the  railways  had  then  been 
in  the  hands  of  the  Government  there  would  have 
been  a  clamorous  outcry  against  mismanagement  by 
jacks-in-office.  As  it  was  companies — "with  no- 
body to  be  kicked,  or  soul  to  be  damned" — that  were 
at  fault,  there  was  never  a  murmur.  In  America, 
that  other  home  of  individual  enterprise,  the  un- 
punctuality  of  the  railroads  is  often  astonishing. 
I  once  travelled — it  is  some  years  ago — from  Pitts- 
burg to  New  York  on  Christmas  Eve.  The  loco- 
motive was  attacked  by  a  malady  called  "hot  box" 
and  the  train  was  four  hours  late.  It  was  full  of 
unfortunate  holiday-makers  who  had  connections  to 
make  in  New  York,  so  as  to  get  home  in  time  for 
the  Christmas  gathering,  but  they  all  seemed  to 
accept  it  as  something  in  the  nature  of  things,  and 
not  a  matter  that  called  for  protest  or  complaint. 

We  had  better  admit  that  in  this  half-baked  world 
of  ours,  in  which  progress  is  only  at  the  beginning 
of  its  journey,  and  man  is  only  just  beginning  to 
learn  the  use  of  his  powers  over  Nature,  not  many 


14     THE  OBJECTS  OF  SPENDING       [chap. 

things  are  yet  very  well  done  either  by  Governments 
or  by  private  enterprise,  and  the  only  way  for 
them  to  get  done  better  is  by  every  one  of  us  trying 
to  do  his  own  little  job  just  as  well  as  ever  he  can. 
In  some  countries  Governments  do  things  better 
than  anybody  else.  In  others,  it  is  otherwise.  In 
England  it  is  safe  to  say  that  Government  has  not 
yet  distinguished  itself  as  a  practical  worker.  It 
has  done  great  things  in  the  war,  but  chiefly  with  the 
help  of  men  who  came  in  from  outside;  and  whether 
the  public's  experience  of  governmental  activity 
during  the  war  will,  or  will  not,  encourage  it  to 
give  Government  more  to  do  when  the  war  is  over, 
is  a  very  open  question. 

Moreover,  even  if  Herbert  Spencer's  view  of  the 
ineptitude  of  governmental  action  were  as  com- 
pletely proved  as  he  believed,  there  are  still  some 
things  which  have  to  be  done  by  a  public  authority, 
as  even  he  would  probably  have  admitted  if  he 
had  lived  to  this  day.  His  notion  of  private  com- 
panies competing  for  the  business  of  draining  towns, 
and  only  cleansing  those  neighborhoods  in  which 
they  could  get  enough  customers  to  make  it  worth 
their  while,  is  now  commonly  recognized  as  a  fan- 
tastic example  of  overdriving  a  principle.  Huxley, 
in  his  great  Essay  on  Administrative  Nihilism,  at- 
tacks the  Spencerian  position  in  the  following  well- 
known  passage: 

"Suppose,  however,  for  the  sake  of  argument,  that 
we  accept  the  proposition  that  the  functions  of  the 


I]  HUXLEY  ON  SPENCER  15 

State  may  be  properly  summed  up  in  the  one  great 
negative   commandment,   'Thou   shalt   not  allow   any 
man  to  interfere  with  the  liberty  of  any  other  man'  •, 
— I  am  unable  to  see  that  the  logical  consequence  is  ' 
any  such  restriction  of  the  power  of  Government  as 
its    supporters    imply.      If    my    next-door-neighbor  {  /  ^_ 
chooses  to  have  his  drains  in  such  a  state  as  to  ere-  ' 
ate  a  poisonous  atmosphere,  which  I  breathe  at  the 
risk  of  typhus  and  diphtheria,   he  restricts  my  just 
freedom  to  live  just  as  much  as  if  he  went  about 
with  a  pistol,  threatening  my  life;  if  he  is  to  be  al- 
lowed to  let  his  children  go  unvaccinated,  he  might  as 
well  be  allowed  to  leave  strychnine  lozenges  about  in 
the  way  of  mine;  and  if  he  brings  them  up  untaught! 
and  untrained  to  earn  their  living,  he  is  doing  his  best' 
to  restrict  my  freedom,  by  increasing  the  burden  ofi 
taxation   for  the  support  of  gaols  and  workhouses,] 
which  I  have  to  pay."  '' 

Since  the  days  when  these  two  giants  threw  moun- 
tains of  arguments  at  one  another,  it  need  not  be 
said  that  Huxley's  view  has  prevailed,  and  more 
than  prevailed.  It  has  wiped  out  the  Spencerian 
doctrine,  and  it  has  been  carried  to  lengths  which 
Huxley  himself  might  well  consider  absurd  if  he 
were  still  alive.  The  popular  cry  in  England  is  now 
for  the  Government  to  do  everything.  An  extraor- 
dinary example,  as  it  happens,  is  chronicled  in  the 
paper  of  this  day  on  which  I  am  writing,  Sunday, 
February  i8th,  19 17.  To-day's  Observer  records 
how — 

"at  a  meeting  of  the  Southend  Townsmen's  Associa- 
^  Critiques  and  Addresses,  p.  10. 


i6     THE  OBJECTS  OF  SPENDING       [chap. 

tion  it  was  suggested  that  the  Minister  of  Labor 
should  be  asked  to  encourage  the  production  of 
food  by  the  closing  of  the  churches  on  Sunday 
morning,  and  so  enabling  a  greater  amount  of  la- 
bor to  be  available.  The  suggestion  had  reference 
to  the  large  number  of  Southend  business  men  and 
clerks  who  are  away  from  home  all  the  week,  and 
have  only  Sunday  mornings  on  which  to  look  after 
their  gardens." 

This  astonishing  paragraph  was  headed  "Church- 
goers' Neglected  Gardens,"  and  seems  to  indicate 
an  extraordinary  state  of  mind  prevalent  in  a  sub- 
urb inhabited  by  people  who  may  be  taken  as  average 
specimens  of  the  dwellers  in  Greater  London.  Be- 
cause people  work  all  through  the  week,  and  can  only 
dig  in  their  gardens  on  Sundays,  it  is  proposed,  in 
order  to  enable  them  to  do  so,  to  get  the  Minister  of 
Labor  to  close  the  churches.  In  a  land  that  calls 
itself  free  and  is  engaged  in  a  great  battle  for  free- 
dom, it  is  really  astounding  that  a  body  of  Southend 
citizens  should  have  seriously  thought  (i)  that  as 
long  as  the  churches  were  open,  their  frequenters 
had  no  freedom  of  choice  about  staying  in  their  gar- 
dens and  growing  food,  and  (2)  that  it  was  the  busi- 
ness of  the  Government  to  help  them  to  do  so  by 
depriving  all  the  other  members  of  the  various  con- 
gregations, who  have  all  the  week  to  dig  in,  of  their 
freedom  to  seek  ghostly  consolation  by  attending 
divine  worship. 

It  is  easy  to  make  too  much  of  a  wild  example 
of  this  kind.     Southend  is  not  England,  and  prob- 


I]    THE  PREVALENT  TENDENCY    17 

ably  the  Townsmen's  Association  is  not  Southend. 
In  war-time  the  babbling  busybody  gets  a  chance,  ^tt. 
in  associations  and  on  committees,  such  as  he  never 
enjoyed  beforci.  But  it  will  hardly  be  denied  that 
this  is  only  an  extreme  example  of  a  tendency  that 
is  rife.  It  is  high  time  that  the  British  public  con- 
sidered this  tendency  seriously  and  reckoned  its  pos- 
sible effects,  if  it  goes  unchecked,  on  the  Govern- 
ment's spending  in  the  future.  It  need  hardly  be 
pointed  out  that  the  spread  of  governmental  activity 
is  bound  to  increase  the  cost  of  government,  since 
everything  that  the  Government  does  costs  money, 
usually  more  than  it  would  if  it  were  done  by  pri- 
vate individuals  or  bodies  managed  thereby.  It  is 
very  evident  that  the  present  tendency  to  leave 
everything  to  Government  is  due  partly  to  the  war, 
because  war  on  its  present  scale  demands  something 
like  dictatorship,  and  when  it  is  necessary  for  victory 
that  the  whole  resources  of  a  nation  shall  be  made 
available  for  purposes  of  defense,  individual  free- 
dom takes  a  very  different  place  in  the  scale  of  im- 
portance. So  far,  there  is  good  reason  for  this  ten- 
dency. But  it  was  also  very  rife  before  the  war, 
and  was  even  then  showing  signs  of  running  to  ex- 
tremes. This  was  natural  and  inevitable,  because  it 
was  only  a  reaction  against  the  extreme  laisscr-faire 
or  "leave-people-alone"  policy,  of  which  Herbert 
Spencer  was  perhaps  the  doughtiest  champion. 

This  policy  had  been  dominant  in  England  in  the 
early  part  of  the  nineteenth  century.  It  was  well 
summed  up  in  the  report  of  a  Commission  appointed 


i8     THE  OBJECTS  OF  SPENDING       [chap. 

by  the  House  of  Commons  in  1810,  quoted  in  Mr. 
and  Mrs.  Webb's  History  of  Trade  Unionism,  as 
follows : 

"No  interference  of  the  legislature  with  the  free- 
dom of  trade,  or  with  the  perfect  liberty  of  every 
individual  to  dispose  of  his  time  and  of  his  labor  in 
the  way  and  on  the  terms  which  he  may  judge  most 
conducive  to  his  own  interest,  can  take  place  with- 
out violating  general  principles  of  the  first  importance 
to  the  prosperity  and  happiness  of  the  community." 

Such  was  the  view  that  was  maintained  by  the 
economists  who  followed  Adam  Smith  and  carried 
much  further  than  he  did  the  revolt  that  he  had 
led  against  the  excessive  interference  by  Govern- 
ment with  trade  and  with  the  freedom  of  individual 
contract,  which  had  marked  the  history  of  the  earlier 
centuries  when,  for  example,  justices  of  the  peace 
fixed  wages,  or  tried  to.  Supporters  of  the  extreme 
laisser-faire  school  based  their  doctrine  on  the  as- 
sumption— so  true  in  an  ideal  world  composed  of 
ideally  educated  people,  so  pathetically  untrue  as 
things  are — that  everybody  is  the  best  judge  of  his 
own  interest,  and  that  if  every  one  is  left  to  pursue 
his  own  interest,  the  best  interest  of  the  commu- 
nity as  a  whole  will  somehow  be  secured.  The 
practical  result  of  the  application  of  this  doctrine, 
in  a  community  in  which  employers  had  been  taught 
that  they  served  the  common  good  by  pur- 
suing their  own  immediate  interests,  and  the 
employed    had    often    been    taught    nothing,    was 


I]  THE  THONG  AS  PRODUCER  19 

that  children  of  five  years  were  sent  to  work  in 
factories,  and  in  France,  according  to  a  report 
pubHshed  in  1840  by  Dr.  Villernie,  "the  thong 
used  for  the  punishment  of  children  in  the  spin- 
ners' trade  appears  as  an  instrument  of  produc- 
tion."^ The  fact  is,  that  very  few  of  us  ever  know 
what  is  best  to  do  for  our  interest.  Most  people  go 
through  life  mechanically,  and  without  thinking 
about  it,  choosing  a  profession  for  some  quite  illog- 
ical reason,  or  being  pitchforked  into  a  position 
without  attempting  to  weigh  it  against  other  pos- 
sibilities. Moreover,  we  are  obliged  to  make  up  our 
minds  about  the  matter,  in  most  cases  long  before 
we  have  got  a  mind  to  make  up.  As  for  the  doc- 
trine that  each  man  by  pursuing  his  own  interest 
helps  to  secure  the  common  good,  its  truth  is  pleas- 
antly illustrated  by  the  millions  nowadays  earned 
by  sellers  of  worthless  medicines  and  printed  trash, 
which  rot  the  public  stomach,  bodily  and  mental. 
If  the  economists  of  the  nineteenth  century  had 
foreseen  the  activities  and  success  of  the  advertisers 
of  the  twentieth,  they  might  have  modified  their 
optimism. 

But  there  is  no  need  to  linger  over  the  absurdities 
thought  and  written  by  the  extremists  of  the  laisser- 
faire  school.  Peace  with  their  ashes,  for  they  did 
a  great  work  in  clearing  away  a  mass  of  rubbish. 
It  was  not  their  fault  that  thongs  were  laid  in  the 
name  of  liberty  on  the  backs  of  bairns  who  ought 

*  Quoted  by  Messrs.  Gide  and  Rist,  History  of  Economic 
Doctrines. 


20     THE  OBJECTS  OF  SPENDING       [chap. 

to  have  been  playing  hopscotch.  Liberty  is  a  god- 
dess with  many  shapes,  looking  quite  different  to 
different  observers.  Abraham  Lincoln  observed 
that — 

"with  some,  the  word  liberty  may  mean  for  each 
man  to  do  as  he  pleases  with  himself  and  the  prod- 
uct of  his  labor;  while  with  others,  the  same  word 
may  mean  for  some  men  to  do  as  they  please  with 
other  men,  and  the  product  of  other  men's  labor.  .  .  . 
The  shepherd  drives  the  wolf  from  the  sheep's  throat, 
for  which  the  sheep  thanks  the  shepherd  as  his  lib- 
erator, while  the  wolf  denounces  him  for  the  same 
act,  as  the  destroyer  of  liberty,  especially  as  the  sheep 
was  a  black  one."  ^ 

It  has  already  been  noted  that  the  extreme  limits 
imposed  on  Government  activity  and  consequently 
on  governmental  expenditure,  by  Herbert  Spencer 
and  the  economists  who  followed  Adam  Smith, 
were  an  exaggeration  of  the  doctrine  laid  down  by 
Adam  Smith.  He  took  a  much  more  level-headed 
view  of  the  matter.  In  his  examination  (in  Chap- 
ter I,  Book  V,  of  the  Wealth  of  Nations)  of  the 
expenses  of  the  Sovereign  or  Commonwealth,  he 
lays  stress  on  his  or  its  duty — 

"of  erecting  and  maintaining  those  public  institutions, 
and  those  public  works  which,  though  they  may  be 
in  the  highest  degree  advantageous  to  a  great  so- 
ciety, are,  however,  of  such  a  nature,  that  the 
profit  could  never  repay  the  expense  to  any  indi- 
vidual, or  small  number  of  individuals,  and  which  it 
'  Speech  at  Baltimore,  April  i8th,  1864, 


I]  ADAM  SMITH  ON  SPENDING         21 

therefore  cannot  be  expected  that  any  individual, 
or  small  number  of  individuals,  should  erect  or  main- 
tain." 

Thus,  in  effect,  he  gives  a  free  hand  to  the  State 
to  spend  money  on  anything  that  will  be  advan- 
tageous to  society,  but  will  not  yield  a  profit. 

With  regard  to  education,  Adam  Smith  arrives 
at  conclusions  which  were  diametrically  opposed  to 
those  of  Herbert  Spencer.  He  points  out  that  in 
cases  in  which  the  state  of  the  society  does  not 
place — 

"the  greater  part  of  individuals  in  such  situations  as 
naturally  form  in  them,  without  any  attention  of 
Government,  almost  all  the  abilities  and  virtues  which 
that    state    requires,    or   perhaps    can    admit    of," 

then — 

"some  attention  of  Government  is  necessary  in  order 
to  prevent  the  almost  entire  corruption  and  degen- 
eracy of  the  great  body  of  the  people." 

He  goes  on  to  show  that,  owing  to  the  division 
of  labor — 

"the  man  whose  whole  life  is  spent  in  performing  a 
few  simple  operations  .  .  .  has  no  occasion  to  exert 
his  understanding.  .  .  .  His  dexterity  at  his  own  par- 
ticular trade  seems,  in  this  manner,  to  be  acquired  at 
the  expense  of  his  intellectual,  social,  and  martial  vir- 
tues. But  in  every  improved  and  civilized  society, 
this  is  the  state  into  which  the  laboring  poor,  that  is, 
the  great  body  of  the  people,  must  necessarily  fall, 
unless  Government  takes  some  pains  to  prevent  it." 


22     THE  OBJECTS  OF  SPENDING       [chap. 

A  little  later  he  shows  that — 

"the  common  people  .  .  .  have  little  time  to  spare  for 
education.  The  parents  can  scarce  afford  to  main- 
tain them  even  in  infancy.  As  soon  as  they  are 
able  to  work,  they  must  apply  themselves  to 
some  trade  by  which  they  can  earn  their  subsistence. 
That  trade  too  is  generally  so  simple  and  uniform  as 
to  give  little  exercise  to  the  understanding;  while, 
at  the  same  time,  their  labor  is  both  so  constant  and 
so  severe  that  it  leaves  them  little  leisure  and  less 
inclination  to  apply  to,  or  even  think  of,  anything 
else.  .  .  .  For  a  very  small  expense  the  public  can 
facilitate,  can  encourage,  and  can  even  impose  upon 
almost  the  whole  body  of  the  people,  the  neces- 
sity of  acquiring  those  most  essential  parts  of  edu- 
cation." 

Here  we  have  the  Father  of  Economics,  so  often 
appealed  to,  by  those  who  do  not  read  him,  as  an 
out-and-out  champion  of  laisser-faire ,  advocating 
compulsory  education,  at  the  public  expense,  nearly 
one  hundred  years  before  it  was  introduced  in 
England. 

It  is  perhaps  even  more  interesting  in  these  war- 
like days  to  note  that  Adam  Smith  thought  that — 

"even  though  the  martial  spirit  of  the  people  were 
of  no  use  towards  the  defense  of  the  society,  yet  to 
prevent  that  sort  of  mental  mutilation,  deformity  and 
wretchedness,  which  cowardice  necessarily  involves 
in  it,  from  spreading  themselves  through  the  great 
body  of  the  people,  would  still  deserve  the  most  seri- 
ous attention  of  Government;  in  the  same  manner  as 


I]  ADAM  SMITH  ON  SPENDING         23 

it  would  deserve  its  most  serious  attention  to  pre- 
vent a  leprosy  or  any  other  loathsome  and  offen- 
sive disease,  though  neither  mortal  nor  dangerous, 
from  spreading  itself  among  them.  .  .  .  The  same 
thing  may  be  said  of  the  gross  ignorance  and  stu- 
pidity which,  in  a  civilized  society,  seems  so  frequently 
to  benumb  the  understandings  of  all  the  inferior 
ranks  of  people,  [Only  the  "inferior"  ranks,  Doc- 
tor?] The  more  they  are  instructed,  the  less  liable 
they  are  to  the  delusions  of  enthusiasm  and  super- 
stition which,  among  ignorant  nations,  frequently  oc- 
casion the  most  dreadful  disorders.  ...  In  free 
countries  where  the  safety  of  government  depends 
very  much  upon  the  favorable  judgment  which  the 
people  may  form  of  its  conduct,  it  must  surely  be  of 
the  highest  importance  that  they  should  not  be  dis- 
posed to  judge  rashly  or  capriciously  concerning  it." 

I  have  dwelt  at  some  length  on  ancient  contro- 
versies concerning  the  limits  of  State  action  and 
consequently  of  State  expenditure,  because  the  ques- 
tion is  a  very  burning  one  to-day,  and  if  we  see 
what  our  forbears  thought  about  it,  we  may  be 
helped  to  a  right  decision  in  our  present  difficulties. 
We  have  seen  the  extreme  view  that  the  State 
should  do  nothing  but  police  and  defense  give  way 
to  a  tendency — even  among  those  who  do  not  pro- 
fess to  be  Socialists  and  to  want  the  State  to  take 
over  the  whole  business  of  production  and  distribu- 
tion— to  call  on  the  State  to  interfere  constantly 
in  the  private  affairs  of  citizens ;  and  looking  back 
to  the  doctrine  of  Adam  Smith,  we  find  that  he  was 
in  favor  of  State  expenditure  on  education  for  those 


24     THE  OBJECTS  OF  SPENDING   [chap.i 

who  could  not  afford  It,  on  the  cultivation  of  the 
martial  spirit,  on  checking  disease,  and  on  the  en- 
lightenment of  those  classes  which,  in  his  opinion, 
especially  needed  it.  I  think  it  mayjairly  be  claimed 
that  the  formula  adopted  earlier  in  this  chapter  may 
be  taken  as  representing  a  safe  compromise  between 
the  extreme  views :  that  is,  that  the  State  should 
spend  our  money  on  the  defense  of  our  property 
from  home  and  foreign  enemies,  on  the  defense  of 
the  national  honor,  on  the  increase  of  the  material 
resources  of  the  country,  and  on  public  health.  At 
first  sight,  this  formula  would  not  appear  to  include 
education,  old-age  pensions,  or  unemployment  in- 
surance. But  it  would  be  very  easy  to  show  that  all 
these  objects  of  expenditure,  in  countries  in  which 
they  are  necessary,  help  the  increase  of  the  material 
resources  of  the  country,  to  which  nothing  can  be 
more  important  than  a  well-taught  community,  and 
a  working  class  with  a  feeling  of  security  and  a 
knowledge  that  the  State  cares  for  its  interests,  and 
is  prepared  to  spend  money  on  its  welfare.  In  fact, 
all  really  effective  measures  of  social  reform  are 
directly  beneficial  to  the  whole  community,  on  the 
coldest  business  considerations.  Every  man  and 
woman  who  is  not  fit  in  mind  and  body  to  be  self- 
supporting  has  to  be  supported,  to  a  greater  or  less 
extent,  by  his  or  her  neighbors ;  and  so  government 
spending  that  lessens  the  number  of  the  unfit,  by 
better  care  for  the  minds  and  bodies  of  those  who 
are  born  into  conditions  which  do  not  give  them  a 
fair  chance,  is  a  sound  investment. 


CHAPTER  II 

MONEY   TAKEN    BY    BORROWING^ 

Whatever  be  the  duties  that  a  Government  is 
asked  to  fulfil,  it  can  only  perform  them  by  taking 
to  its  own  use  such  goods  and  services  as  are  needed 
for  them.  To  keep  order  at  home  it  must  have 
the  services  of  policemen  and  the  goods  needed  to 
feed,  clothe,  and  equip  them.  To  build  a  railway 
it  must  have  steel  rails,  rolling  stock,  and  land  and 
the  services  of  all  the  people  who  lay  the  railway 
out  and  get  it  ready  for  working.  To  carry  on  war 
it  must  have  all  the  goods  needed  for  the  feeding 
and  equipment  of  an  army  and  the  services  of  the 
fighters  and  of  those  who  organize  and  manage 
the  campaign,  the  transport  service,  and  all  the  other 
items  in  the  problem.  These  goods  and  services 
have  to  be  supplied  out  of  current  production  at 
home  and  abroad,  and  so  current  production  has 
to  be  diverted,  to  the  extent  of  the  Government's 
demand,  to  supplying  those  needs,  unless  (which  is 
unlikely  in  time  of  war)  it  can  be  increased  suffi- 

^  Since  this  chapter  was  written  I  have  been  fortified  by 
seeing  its  main  contention  endorsed  by  Professor  Sprague,  of 
Harvard,  in  an  article  in  The  Economic  Journal  for  April 
1917,  which  embodied  an  address  given  by  him  to  the  Ameri- 
can Economic  Association. 

25 


26  MONEY  TAKEN  BY  BORROWING    [chap. 

ciently  to  produce  them  without  this  diversion.  In 
order  to  bring  about  this  diversion,  Government 
has  to  check  the  demand  of  individuals  for  goods 
and  services  so  that  labor  and  energy  may  be  set 
free  to  work  for  it;  and  this  it  does  by  taking  money 
from  individuals  in  taxes,  which  it  can  only  im- 
pose on  its  own  citizens,  or  in  loans,  or  by  reducing 
the  buying  power  of  individuals  through  the  proc- 
ess known  as  inflation,  which  consists  of  increasing 
the  volume  of  the  currency  and  thereby  debasing 
its  value  and  raising  prices. 

We  will  begin  with  the  borrowing  process.  When 
a  Government  borrows,  it  invites  people  to  lend  it 
money,  and,  as  a  rule,  promises  to  pay  them  a 
certain  rate  of  interest  for  it,  and  sometimes  prom- 
ises to  pay  back  the  money  to  them  or  their  heirs 
and  assigns  at  some  more  or  less  distant  date.  Even 
when  no  such  promise  of  repayment  is  given  to 
the  lenders,  the  fact  that  the  holder  of  the  security, 
or  promise  to  pay  interest,  can  always  sell  it  at 
a  price  on  the  Stock  Exchange,  enables  him  to 
rely  on  getting  back  at  least  part  of  the  money 
that  he  has  lent,  if  he  wishes  to  do  so. 

It  was  stated  that  when  a  Government  borrows 
it  promises,  as  a  rule,  to  pay  interest.  This  is  now 
so  usual  that  a  loan  without  interest  seems  to  a 
modern  mind  to  be  almost  a  contradiction  in  terms. 
But  such  things  have  happened.  In  the  good  old 
days  impecunious  sovereigns  who  could  not  get  as 
much  as  they  wanted  out  of  their  subjects  by 
taxation,  used  to  write  to  people  of  property  and 


ii]  LOANS  WITHOUT  INTEREST         27 

demand  a  sum  from  them  on  loan;  the  latest  ex- 
ample, in  England,  of  this  form  of  finance  occurred       ^-lyy^^ 
in  the  early  years  of  the  reign  of  James  I.    A  large 
number  of  these  letters — which  were  called  Letters 
of  Privy  Seal — dated  July  31st,  1604,  were  sent  to  ^ 

the  principal  noblemen  and  gentlemen  in  all  the  coun- 
ties of  England,  and  excited  great  and  general  dis-        . , 
satisfaction.     Their  form  was  as   follows: 

"By  the  King:  -.^^ 

"Trustie   and   well    beloved    we   greete  you   well.  ,y 

Although  there  be  nothing  more  against  our  minde  '"'"'^ 

than  to  be  drawne  into  any  course  that  may  breed 
in  our  subjects  the  least  doubt  of  our  unwillingness 
to  throw  any  burthen  upon  them,  having  already 
published  both  by  our  speeches  and  writings,  our 
great  desire  to  avoide  it  in  the  whole  course  of  our 
Government:  Yet  such  is  our  estate  at  this  time  in 
regarde  of  great  and  urgent  occasions  falne  and 
growing  daily  upon  us,  (in  no  sort  to  be  eschewed) 
as  wee  shall  be  forced  presently  to  disburse  greater 
summes  of  money  than  it  is  possible  for  us  to  pro- 
vide by  any  ordinary  means,  or  to  want  without 
great  prejudice,  in  which  consideration  ...  we 
think  it  needless  to  use  any  more  arguments  from 
such  a  King  to  such  subjects :  But  that  as  our  ne- 
cessitie  is  the  only  cause  of  our  request,  so  your 
love  and  duety  must  be  the  chiefe  motive  of  your 
ready  performance  of  the  same  .  .  .  That  which 
we  require,  therefore,  is  that  within  twelve  dayes 
after  the  receipt  hereof,  you  will  cause  the  summe 
of  to  be  delivered  to  whom  we 

have  appointed  to  be  our  collector  in  our  countie 
Qf 


28   MONEY  TAKEN  BY  BORROWING    [chap. 

"The  loan  whereof  we  do  desire  to  be  untill  the 
Foure  and  Twenty  day  of  March  which  shall  be  in 
the  yeere  of  our  Lord  God  1605,  for  assurance 
whereof  we  have  directed  these  our  letters  of  Privie 
Scale  unto  you,  which,  with  the  hand  of  our  sayd 
collector  testyfying  the  receipt  of  the  same  summe 
of  shall  bind  us,  our  heirs,  and  suc- 

cessors for  the  repaiment  thereof  .  .  .  upon  the  de- 
liverie  of  this  our  Privie  Scale  unto  our  sayd  re- 
ceipt." 2 

Through  all  the  rambling  verbiage  of  this  Letter 
of  Privy  Seal,  a  large  part  of  which  has  been  left 
out,  there  is  no  whisper  or  hint  of  any  interest 
payment.  The  loan  was  for  nearly  eight  months, 
and  from  its  terms  was  evidently  a  requisition,  leav- 
ing the  receiver  of  the  letter  little  or  no  choice 
about  producing  the  sum  required  of  him. 

In  modern  times,  however,  these  things  do  not 
happen.  A  rate  of  interest  is  universal,  and  a  defi- 
nite promise  of  repayment  is  very  usual.  It  is 
notably  absent,  however,  in  the  case  of  the  British 
Government  Consols.  The  holder  of  Consols  has 
no  right  to  repayment  from  the  Government,  only 
the  right  to  a  perpetual  annuity  of  so  much  a  year, 
originally  3%,  converted  in  1888  to  2^%  and  in 
1903  to  2^%.  A  very  large  part  of  the  French 
3%  Rentes  are  also  what  is  called  a  perpetual  debt, 
with  no  obligation  on  the  part  of  the  debtor  to  repay. 

When  a  Government  raises  money  by  borrowing 
it  thus  hires  certain  of  its  citizens,  or  those  of  any, 

•Chisholm's  Analysis  of  the  Public  Accounts,  p.  509. 


II]       ADVANTAGES  OF  BORROWING      29 

other  country  who  may  like  to  subscribe  to  the 
loan,  to  find  money  for  it,  and  it  does  so  by  prom- 
ising them  a  rate  of  interest,  varying  according 
to  the  state  of  the  money  market,  its  own  credit, 
and  the  circumstances  under  which  the  loan  is  made. 
Borrowing  thus  has  this  very  tempting  but  always 
dangerous  advantage  over  taxation,  that  it  enables 
a  Government  to  get  money  from  the  citizens  of 
other  countries.  Let  us  leave  this  consideration 
on  one  side  for  the  time  and  see  what  are  the  advan- 
tages and  disadvantages  of  borrowing  at  home  over 
taking  money  in  taxes. 

From  the  point  of  view  of  the  practical  and  adroit 
politician,  who  wants  money  for  the  State  and  does 
not  want  to  make  himself  or  his  policy  unpopular 
by  increasing  the  burden  of  taxation,  the  advan- 
tages of  borrowing  are  obvious  and  overwhelming. 
To  the  public  the  advantages  are  equally  clear  and 
weighty,  because  the  public  thinks  that  by  means  of 
the  borrowing  system  it  is  able  to  avoid  being  taxed, 
and  to  hand  on  to  posterity  the  task  of  finding 
the  money  that  is  required  for  its  present 
needs. 
'  This  view  has  been  dinned  into  the  public  ear 
by  economists,  financial  writers  (among  whom  I 
must  plead  guilty  to  having  done  my  small  share), 
and  business  men.^  But  it  is  largely  a  delusion. 
Let  us  take  the  example  of  the  present  war.     We 

/  '  A  New  York  banker's  circular,  dated  April  14th,  1917,  says  : 
/  "Posterity  will  chiefly  benefit  from  the  struggle  for  freedom 
I  and  should  pay  its  part." 


30  MONEY  TAKEN  BY  BORROWING    [chap. 

cannot  hand  its  burden  on  to  posterity.  It  has  to 
be  paid  for  now  by  somebody,  and  all  wars  have 
always  been  paid  for  during  the  time  in  which  they 
were  fought  and  finished  up.  War  cannot  be  carried 
on  with  goods  produced  or  work  done  either  by 
our  ancestors  or  by  our  posterity.  The  goods  con- 
sumed in  war — shot,  shells,  rifles,  food,  clothes, 
horses,  motor-lorries,  wagons,  ships,  and  everything 
else — have  to  be  new  and  up  to  date,  and,  apart 
from  the  store  of  them  with  which  the  contending 
nations  began,  are  made  and  produced  as  the  war 
goes  on.  As  they  clearly  have  to  be  in  existence 
before  they  can  be  used,  it  is  obvious  that  they  can- 
not be  produced  by  posterity.  The  British  army 
cannot  eat  the  bread  that  is  going  to  be  sown  in 
1930.  or  wear  boots  made  out  of  hides  whose  origi- 
nal owners  are  yet  unborn.  Whatever  posterity  pro- 
duces will  belong  to  posterity  for  its  own  use,  and 
nothing  that  we  do  now  can  deprive  posterity  of  a 
single  ear  of  wheat  that  it  sows  and  grows.  It  is 
true  that  when  England  sells  part  of  her  accumu- 
lated wealth,  in  the  form  of  securities,  to  Americans, 
in  order  to  pay  for  goods  wanted  for  the  war,  or 
when  she  borrows  in  America  and  contracts  to  pay 
Americans  interest  in  the  meantime  and  their  money 
back  some  day,  she  thereby  arranges  that  a  larger 
share  of  posterity's  wealth  will  go  to  America  and  a 
lesser  share  to  her;  but  the  sum  of  posterity's 
wealth  will  not  thereby  be  affected,  and  this  only 
happens  when  a  country  borrows  from,  or  sells' 
securities  to,  other  countries,  and  this  side  of  war 


II]  GILDING  A  PILL  31 

finance  we  are  not  at  present  considering.  Confining 
ourselves  to  that  portion — by  far  the  greater — of 
our  war  borrowings  that  are  raised  at  home,  we  see 
if  we  look  at  the  matter  steadily  that  the  borrowing 
policy  is  only  a  gilding  that  makes  us  swallow  a 
pill  and  believe  that  we  are  eating  something  good 
and  nourishing.  The  British  Government  wants 
money  and  offers  its  citizens  a  beautiful  security, 
with  5%  interest,  at  95,  repayable  in  thirty  years 
at  par,  and  they  calculate  that  these  terms  give 
them  a  net  return  of  ^J4%  ior  their  money. 
With  the  help  of  a  tremendous  advertising  cam- 
paign, and  a  very  real  and  patriotic  effort  on  the  part 
of  a  large  number  of  good  citizens,  the  nation  hands 
over  1,000  million  pounds  to  the  Government,  and 
the  achievement  is  very  justly  hailed  as  the  biggest 
financial  success  ever  won.  It  is  a  perfectly  magnifi- 
cent success.  But  it  does  not  mean  that  the  citizens 
have  thereby  handed  to  posterity  the  business  of  pay- 
ing for  1,000  million  pounds'  worth  of  the  war. 
They  have  paid  now  by  handing  over  those  1,000 
millions.  In  return  for  them  they  receive  from  the 
Government  securities,  that  is,  promises  to  pay  in- 
terest and  repay  capital,  and  the  Government  can 
only  meet  these  promises  out  of  their  pockets.  These 
securities  are  assets  that  they  hold,  in  return  for 
their  money,  but  they  are  also  liabilities  that  they 
as  taxpayers  have  to  meet;  they  will  only  get  in- 
terest on  their  money  as  we  pay  it  ourselves,  and 
they  will  only  get  their  money  back  as  debt-holders 
if  they  pay  it  as  taxpayers. 


32   MONEY  TAKEN  BY  BORROWING    [chap. 

But  what  of  the  man  who  did  not  subscribe  to 
the  loan,  having  an  income  large  enough  to  let  him 
do  so  ?  He,  as  far  as  this  loan  is  concerned,  appears 
to  have  paid  nothing  towards  the  war.  If  this 
were  really  so  it  would  not  be  a  good  argument  in 
favor  of  the  borrowing  system,  for  it  would  make 
patriotic  people  pay  and  leave  the  others  free  to 
spend  money  on  themselves.  But,  in  fact,  those  who 
do  not  subscribe  to  loans  probably  pay  more  in 
the  long  run,  because  they  have  henceforward  to 
pay  their  share  of  taxation  to  meet  the  interest  on 
the  loan,  and  as  they  do  not  hold  any  of  it  they  get 
no  share  of  interest  payment  back  into  their  own 
pockets.  The  borrowing  system  gives  the  citizen 
the  choice  of  (i)  paying  up  his  share  of  the  war 
cost  now  by  subscribing  to  a  loan,  and  afterwards 
being  taxed  to  pay  himself  interest  and  to  pay  him- 
self back,  or  (2)  paying  nothing  at  the  time  when 
the  loan  is  issued,  and  being  made  to  pay  regularly 
hereafter  interest  and  redemption  money  to  those 
who  subscribed.  When  a  Government  loan  is  issued, 
all  the  taxpayers  on  whom  the  loan  charge  will 
fall  are,  forthwith  and  at  once,  jointly  poorer  by 
the  amount  of  the  loan.  Those  who  have  found 
the  money,  and  paid  for  the  object  needed  by 
making  a  sacrifice  now,  have  an  asset  to  set  against 
the  future  increase  in  taxation. 

But,  it  will  be  objected,  a  man  who  has  subscribed 
for  f  1,000  of  the  loan  will  be  able  to  sell  it,  very 
likely  at  a  profit,  in  a  few  years'  time.  Then  he 
will  have  got  his  money  back,  and  somebody  else 


II]  THREE  TIMES  OVER  33 

will  have  paid  It  back  to  him.  Quite  true,  but  the 
result  of  his  selling  will  be  that  he  will  have  got 
rid  of  his  asset  but  not  of  his  liability.  He  will  no 
longer  receive  interest  on  the  stock  that  he  has 
sold,  but  he  will  continue  to  pay  Interest  on  It,  and 
perhaps  money  for  Its  redemption,  all  of  which  will 
go  Into  the  pocket  of  the  man  to  whom  he  sold, 
instead  of  into  his  own.  He  and  his  estate  after 
him,  in  whosoever' s  hands  It  be,  will  have  to  com- 
plete the  repayment  to  somebody  else  of  the  money 
which  he  thought  he  had  got  back  again  when  he 
sold  his  stock.  By  borrowing  for  war  purposes  a 
Government  sets  up  a  roundabout  process  by  which 
the  war,  In  so  far  as  it  is  paid  for  by  this  means, 
is  paid  for  three  times  over.  First,  It  Is  paid  for 
as  it  goes  on  by  the  citizens  who  subscribe  to  thcr 
loans ;  then  it  is  paid  for  by  the  citizens  as  a  whole, 
who  provide  the  money  needed  for  this  purpose, 
plus  interest,  by  taxation;  and  the  Government 
finally  hands  the  money  back  to  the  original  sub- 
scribers, or  their  estates.  f 

The  unwieldiness  of  the  whole  arrangement  is 
seen  best  If  we  imagine  a  nation  composed  of  citi- 
zens all  with  the  same  Income  and  taxed  to  the  same 
extent.  Let  us  suppose  that  there  are  ten  million 
heads  of  families  each  with  an  income  of  $1,500  a 
year.  The  Government  offers  a  5%  loan  and 
they  each,  being  equally  patriotic,  subscribe  $500; 
this  produces  5,000  millions,  and  each  family  has 
$500  less  to  spend  that  year,  because  its  $500  has 
gone  into  the  hands  of  the  Government.   They  will 


34   MONEY  TAKEN  BY  BORROWING    [chap. 

j  have  the  interest  to  spend?  By  no  means.  In  or- 
der to  pay  them  their  5%  the  Government  will 
have  to  raise  250  millions  in  taxes  (or  in  another 
loan),  that  is,  take  $25  each  out  of  their  pockets  and 
pay  it  back  to  them.  And  as  soon  as  the  war  is  over 
the  Government  will  set  a  Sinking  Fund  to  work  to 
pay  the  loan  off.  A  Sinking  Fund  is  money  used 
for  paying  off  debt,  and  has  to  be  provided  by  a 
balance  of  revenue  over  expenditure.  If  the  Gov- 
ernment fixes  this  Sinking  Fund  at  1%,  it  will 
have  to  take  another  $5  from  the  pocket  of  each  cit- 
izen, and  so  they  will  pay  themselves  back  their 
capital.  If,  in  the  meantime,  any  one  of  them  sells 
his  $500  bonds  to  a  neighbor,  he  will  have  got  his 
money  back,  but  he  will  still  as  a  taxpayer  have  to 
pay  his  $30  a  year  till  the  loan  is  extinguished,  so 
that  the  effect  of  getting  his  money  back  will  be  that 
he  will  be  paying  his  neighbor  interest  and  capital 
instead  of  himself.  When  we  clear  the  problem 
by  this  imaginary  example  we  see  at  once  that  the 
nation  paid  for  the  war  when  it  happened,  but 
merely  because  it  preferred  to  lend  instead  of  being 
taxed  it  went  through  an  elaborate  process  of  pay- 
ing itself  all  over  again,  so  that  it  might  feel 
happier  about  it.  It  is  fairly  safe  to  say  that,  under 
such  circumstances,  an  intelligent  people  would  soon 
awake  to  the  fact  that  it  would  save  itself  and  its 
rulers  a  good  deal  of  trouble  and  some  book-keeping 
expense,  by  submitting  to  taxation  at  the  time  when 
the  war  is  in  progress  and  writing  off  the  cost  of 

the  war  at  once. 
I 


II]  ELUSIVE  POSTERITY  35 

But  of  course  nations  do  not  consist  of  citizens 
with  equal  incomes,  equally  taxed,  and  they  do  not 
subscribe  equal  amounts  to  the  loans  that  are  raised 
by  their  Governments.  This  inequality  complicates 
the  problem,  but  does  not  alter  the  fact  that  the 
war  has  to  be  paid  for  as  it  goes  on,  and  in  so  far 
as  it  is  paid  for  by  raising  loans  at  home,  is  paid 
for  out  of  the  nation's  current  income.  If  we  try 
to  pay  for  it  by  selling  our  old  investments  to  one 
another,  those  who  buy  the  old  investments  must 
have  a  balance  available  to  pay  for  them.  The  gen- 
eration which  lends  the  money  either  pays  itself 
back  out  of  subsequent  taxation,  or  is  not  paid  back 
at  all;  it  cannot  be  paid  back  by  posterity,  because 
whatever  posterity  pays  it  pays  to  itself.  The  whole 
notion  that  we  can  leave  posterity  the  task  of  paying 
for  any  part  of  the  war,  by  borrowing  at  home,  is 
a  delusion.  Perhaps  it  is  lucky  that  we  cannot  do  so, 
for  posterity  is  likely  to  have  plenty  of  problems  of 
its  own  to  face.  But  whatever  it  produces  it  con- 
sumes. What  we  can  do,  and  are  doing,  in  England 
is  to  lessen__the  power  of  posterity  to  produce,  be- 
cause we  shall  hand  on  to  it  a  less  well-equipped 
industrial  and  agricultural  organization,  owing  to 
the  fact  that  during  the  war  we  are  not  saving  and 
putting  into  capital  improvements  as  much  as  we 
did  in  peace.  Before  the  war  England  was  esti- 
mated to  be  saving  and  investing  at  home  and 
abroad  some  400  millions  sterling  a  year,  so  increas- 
ing either  her  own  power  to  make  and  grow  things, 
or  the  debt  of   other  countries   to  her  on  which 


36   MONEY  TAKEN  BY  BORROWING    [chap. 

they  paid  her  interest  in  the  form  of  goods  and 
services.  During  the  war  nearly  all  her  savings 
go  into  furnishing  victory  for  the  cause  of  liberty 
and  progress  and  protecting  her  property  against 
external  attack.  On  the  other  hand,  she  may  fairly 
hope  to  hand  on  to  posterity  a  better  organiza- 
tion and  a  better  spirit  than  she  would  have  be- 
queathed to  it,  if  she  had  not  learnt  many  useful 
lessons  from  that  stern  schoolmaster  the  God 
of  Battles,  who  has  birched  her  soundly  for  her 
good. 

But  as  incomes  are  unequal  and  taxation  likewise, 
and  as  people  subscribe  unequal  amounts  to  loans 
levied  by  Governments,  let  us  see  what  is  actually 
the  effect  of  the  borrowing  policy.  If  we  compare 
first  the  case  of  two  Englishmen  with  the  same  in- 
come lending  unequal  amounts,  we  find  two  people 
with  f  i,ooo  a  year,  of  whom  Jones  puts  £50  into  the 
loan  and  Smith  £500.  They  will  both  have  their 
taxes  increased  to  the  same  extent  to  pay  interest  on 
the  loan  and  provide  a  Sinking  Fund  to  redeem  it; 
but  one  will  get  £2  los.  3l  year  (less  income  tax)  in 
interest,  and  the  other  £25.  If  the  circumstances 
of  both  are  the  same,  this  is  quite  just,  because 
Smith  is  rewarded  after  the  war  for  the  effort  that 
he  made  during  it  by  putting  half  his  income  at 
the  disposal  of  the  Government  when  it  called  on 
the  citizens  to  subscribe;  probably  the  interest  that 
he  gets  will  more  than  offset  the  higher  taxation 
that  the  existence  of  the  war  debt  will  necessi- 
tate.   In  the  case  of  Jones,  who  continued  to  spend 


II]  AN  EVIL  AFTERMATH  37 

most  of  his  income  on  himself,  and  only  put  in 
a  small  amount  to  be  spent  on  powder  and  shot 
for  the  army,  he  will  only  get  a  small  sum  in 
interest,  which  will  almost  certainly  be  less  than 
the  extra  taxes  that  he  will  pay.  So  that  in  cases  in 
which  conditions  are  equal,  the  interest  payment,  by 
rewarding  patriotic  effort  in  war  time,  gives  a  just 
and  well-earned  guerdon  to  those  who  saw  their 
country's  need  and  made  the  right  effort  to  meet  it. 

But  if  we  find  that  Jones  was  educating  five 
children,  whereas  Smith  was  a  bachelor,  it  becomes 
evident  at  once  that  Jones's  £50  that  he  subscribed 
to  the  loan  was  a  greater  effort — cost  him  more  in 
health  and  comfort  for  himself  and  his  youngsters 
— than  Smith's  £500,  so  that  the  after-effect  of  the 
borrowing  system  in  penalizing  Jones  and  .benefit- 
ing Smith  is  highly  inequitable.  And  this  is  a  very 
serious  evil  in  the  aftermath  of  borrowing  by  Gov- 
ernments, that  by  its  inability  to  discrimii^te  be- 
tween the  effort  made  by  the  various  subscribers  it 
emphasizes  the  inequities  of  the  system  of  taxation. 

If,  then,  borrowing  has  this  merely  stupid  effect 
that  the  payment  for  the  object  which  is  secured  is 
carried  out  twice,  first  when  the  lenders  hand  their 
money  over  to  the  Government  to  spend  on  the 
desired  purpose,  and  later  and  more  gradually  when 
they  hand  their  money  over  to  the  Government  to 
be  paid  back  again  to  themselves,  what  are  the 
advantages  about  it  which  make  it  so  poguljj.  with , 
practical  politicians  and  the  public  whom  they  have 
to  keep  in  a  good  temper?     It  is  simply  this,  that 


389193 


38   MONEY  TAKEN  BY  BORROWING    [chap. 

the  borrowing  system  makes  lis  feel  happier  and 
keeps  us  in  a  good  temper  because  we  see  the 
security  that  we  have  received  and  the  interest 
that  we  get  on  it,  and  forget  that  the  interest  comes 
out  of  our  own  pockets  and  that  if  the  loan  is  paid 
back  to  us  it  will  be  paid  back  out  of  our  own 
pockets.  When  we  subscribe  to  the  loan  we  either 
do  so  out  of  money  that  we  borrow — a  process  that 
will  be  considered  in  the  next  chapter  when  we 
come  to  deal  with  the  question  of  inSation — or 
out  of  money  that  we  save,  or  by  drawing  down 
our  bank  balances,  in  which  case,  unless  we  have 
been  stupid  enough  to  keep  unnecessarily  big  ones, 
we  shall  save  to  replenish  them.  If  we  save  we 
have  so  much  less  to  spend  on  our  own  comforts 
and  amusements,  or  so  much  less  to  invest  in 
other  directions,  from  which  we  should  have  re- 
ceived interest  and  repayment  that  would  not  have 
come  out  of  our  pockets.  So  by  subscribing  we 
hand  over  our  money  to  be  spent  on  the  war  and 
so  pay  for  the  war  as  it  goes  on.  If  we  do  not 
subscribe  but  continue  to  spend  as  usual,  then  the 
taxation  involved  in  order  to  pay  interest 
and  redemption  of  the  loan  comes  out  of  our  pockets 
and  does  not  come  back  again.  So  that  the  borrow- 
ing system  gives  us  this  choice,  of  postponing 
paying  our  full  share  of  the  war's  cost  during  its 
course,  and  only  meeting  it  over  a  period  of  years 
by  paying  taxes  needed  for  the  debt  charge  and 
getting  none  of  it  back  in  interest  or  repayment. 
If   we   exercise  this   choice  and   die  immediately 


ii]  ESCAPE  BY  DEATH  39 

after  the  loan  has  been  brought  out,  we  apparently 
escape  paying  for  our  share  of  the  war  altogether, 
because  we  are  never  taxed  to  pay  interest  to  any- 
body. But,  in  fact,  we  die  so  much  poorer  because 
the  estate  that  we  leave  does  not  contain  the  amount 
of  war  loan  to  which,  if  we  had  done  our  duty, 
we  should  have  subscribed,  and  it  does  carry  with 
it  the  liability  which  will  fall  on  our  heirs  and 
assigns  to  pay  their  share  of  the  debt  charge  in 
taxation.  In  other  words,  we  have  left  the  job 
of  paying  for  the  war  to  our  heirs,  and  is  not 
this  the  same  as  leaving  it  to  posterity  ?  Yes ;  but 
we  can  only  perform  this  feat  if  we  die  at  once. 
If  the  Government  offers  a  loan  for  war  or  any 
other  purpose,  all  the  taxpayers  immediately  become 
liable  to  pay  interest  on  it,  and  any  one  who  does 
not  subscribe  for  such  proportion  of  it  as  his  in- 
come and  conditions  indicate,  will  consequently  be 
so  much  the  poorer,  as  long  as  he  is  alive,  until 
the  loan  is  redeemed,  and  will  be  so  much  the  poorer 
at  his  death,  because  his  estate  will  be  encumbered 
by  the  debt  charge  and  will  hold  no  asset  against  it. 
If  he  subscribes  his  fair  share  he  has  so  much  the 
less  to  spend  when  he  does  $0,  but  afterwards,  if 
taxation  is  fairly  apportioned,  has  his  interest  and 
his  share  of  the  loan,  as  repaid,  to  set  against  the 
extra  taxation. 

It  is  commonly  said  that  England  is  still,  as  a 
nation,  paying  for  the  cost  of  the  war  that  her  an- 
cestors waged  against  Napoleon  more  than  a  hun- 
dred years  ago.     But  this  is  not  so.     As  taxpayers 


40   MONEY  TAKEN  BY  BORROWING    [chap. 

Englishmen  pay  interest  on  the  debt  then  raised. 
But  they  pay  that  interest  to  those  Englishmen  who 
^tipld  the  debt  by  inheritance  or  otherwise*  As  a  na- 
tion England  enjoys  now  all  that  she  produces,  and 
the  vagaries  of  her  ancestors  only  affect  the  man- 
ner in  which  her  production   is  distributed. 

But  what  happens  in  the  case  of  loans  that  are 
never  repaid?  Never  is  a  long  word,  but  if  we 
can  really  conceive  that  as  long  as  mankind  lasts 
the  existing  national  debts  will  be  outstanding,  then 
the  interest  charge  will  continue  to  be  a  burden  to 
the  citizens  as  a  whole,  and  an  income  to  the  heirs 
of  those  who  originally  subscribed. 

Borrowing  at  home,  then,  for  war  purposes  or 
any  other,  does  not,  as  is  usually  supposed,  shift 
the  burden  of  payment  on  to  the  shoulders  of  pos- 
terity. Whatever  it  is  that  the  Government  is  buy- 
ing, whether  it  be  the  services  and  equipment  of 
an  army  in  the  field,  or  a  system  of  sanitation,  or 
a  railway,  has  to  be  paid  for  by  somebody  at  the 
time  when  it  is  provided.  By  raising  the  money 
by  a  loan  instead  of  by  taxation  the  Government 
escapes  the  unpopularity  which  a  great  increase  in 
taxation  might  produce,  and  hires  some  of  the  cit- 
izens to  pay  now,  and  then  taxes  them  all  to  pay 
interest  and  redeem  the  debt.  Those  who  have  sub- 
scribed receive  a  security  which  they  can  sell,  and 
as  long  as  they  hold  it  receive  interest  which  they, 
in  common  with  the  rest  of  the  community,  have 
to  find  by  paying  taxes. 

The  system  thus  has  this  advantage  in  a  com-^ 


II]  DEBT  AND  WEALTH  41 

munity  in  which  wealth  is  unequally  distributed, 
that  it  enables  those  who  have  a  margin  of  income 
above  the  necessaries  of  life  to  pay  for  whatever  be 
the  object  that  the  Government  wants  without  at 
the  time  feeling  any  poorer,  because  they  get  a 
security  that  makes  them  think  they  are  actually 
richer.  If  taxation  is  equitably  imposed  they  will 
afterwards  be  taxed  to  pay  themselves  interest  in 
proportion  to  the  amount  that  they  ought  to  have 
put  into  the  loan  when  appealed  to  by  the  Govern- 
ment. But  here  comes  in  a  great  difficulty,  as  we 
shall  see  when  we  come  to  the  question  of  taxa- 
tion. If  those  with  a  margin,  who  can  save  with- 
out serious  discomfort,  take  up  all  or  the  greater 
part  of  the  loan,  and  then  taxes  are  imposed  on  all, 
whether  they  have  a  margin  or  no,  then  the  system 
of  financing  Government  spending  by  loan  tends. 
to  accumulate  more  and  more  wealth  in  the  hands 
of  those  who  are  well  off.  The  existence  of  a 
1- J,  national  debt,  held  by  the  citizens  of  the  nation, 
redoes  not  affect  the  wealth  of  the  nation  as  a  whole. 
"^  >:^  The  wealth  of  a  nation  consists  of  its  material 
V-1  assets  in  the  way  of  industrial  plant,  agricultural 
y  estates  and  stock,  houses,  roads,  railways,  canals, 
and  so  on,  and  its  holding,  if  any,  of  foreign  invest- 
ments, and  its  income  consists  of  the  annual  pro- 
duce of  these  material  assets  as  organized  and 
worked  as  a  going  concern  by  the  nation's  brains 
and  sinews.  These  assets  and  this  working  power 
are  no  less  productive  because,  owing  to  existence 
of  a  national  debt,  certain  people  have  to  be  paid 


42  MONEY  TAKEN  BY  BORROWING    [chap. 

out  of  the  taxes  levied  on  this  national  produce. 
But  the  distribution  of  the  national  produce  is 
seriously  affected,  because  it  means  that  the  debt- 
holders,  without  making  any  further  effort,  get  for 
all  time,  as  long  as  the  loan  is  outstanding,  a  large 
slice  of  the  nation's  revenue,  which  has  to  be  found 
out  of  its  annual  produce:  and  if  this  debt-charge 
is  heavy  and  any  large  part  of  the  nation  thinks 
itself  to  be  overtaxed,  there  is  only  too  likely  to 
be  discontent  and  resentment  on  the  part  of  those 
who  pay  interest  to  the  holders  of  war  debt  and 
forget  that  these  holders  are  the  people  who  found 
the  money  to  pay  for  the  war,  or  their  representa- 
tives. If  this  grievance  were  acutely  felt,  it  might 
endanger  the  stability  of  property.  A  system  based 
on  property  is  not,  of  course,  the  only  conceivable 
system  under  which  mankind  need  work  for  its 
'living.  But  so  far  it  is  the  only  one  that  has  been 
found  to  work,  and  it  would  be  dangerous  to  im- 
peril it  before  we  are  ready  with  a  substitute.  So 
that,  though  we  cannot  by  any  ingenuity  make  pos- 
terity pay  for  war  or  anything  else  on  which  we 
or  our  Government  spend  money  now,  we  may  by 
the  adoption  of  the  borrowing  system  leave  some 
very  awkward  problems  to  it.  Whatever  posterity 
produces  it  will  consume;  but  the  fact  that  certain 
members  of  posterity,  descendants  of  those 
who  paid  on  our  account,  will  thereby  have 
a  prior  lien  on  posterity's  produce  might  have  awk- 
ward results. 

Since,  then,  the  view  that  borrowing  at  home  puts 


^ 


II]  BORROWING  FOR  WAR  43 

the  burden  on  to  posterity  is  a  delusion,  since  the 
goods  and  services  needed  for  war  or  for  anything 
else  on  which  a  Government  is  spending  have  to 
be  found  and  paid  for,  by  somebody,  at  the  time 
when  the  thing  is  done,  and  since  the  system  of 
hiring  certain  of  the  citizens  to  do  the  paying  at 
that  time,  and  giving  them  a  claim  on  part  of  the 
nation's  income  in  return,  may  have  dangerous  con- 
sequences when  carried  far,  does  it  follow  that  bor- 
rowing at  home  is  a  policy  that  is  never  justified 
on  economic  grounds,  though  it  may  be  necessitated 
by  the  exigencies  of  politics  and  the  need  for  keep- 
ing the  public  in  a  good  temper  at  a  time  of  crisis? 
x:I  think  it  does,  from  the  purely  theoretical  point 
'^-of  view,  except  when  the  object  on  which  the  money 
v  is  to  be  spent  is  an  enterprise  like  a  railway,  from 
*=«y:  which  a  profit  may  be  expected  at  least  sufficient 

^'  to  cover  the  interest  on,  and  redemption  of,  the 
debt  put  into  it.  But  perhaps  a  case  might  be 
made  out  for  borrowing  for  purposes,  such  as 
education  and  health,  which,  if  the  money  is  well 

"V  spent  on  them,  may  be  expected  to  improve  the 
^   country's  productive  power. 

(J  War  is  certainly  the  worst  purpose  for  which  the 
borrowing  system  can  be  used,  because  in  war-time, 
especially  when  war  is  on  a  stupendous  scale  as 
now,  taxation  (i)  is  easily  raised,  (2)  is  little  if  any 
hindrance  to  industry,  and   (3)    produces  a  bene- 

c§^  ficial  effect  on  the  consumption  oFthe  community. 

*^  Moreover  war,  especially  when  on  ,a  stupendous 
"^   scale,  is  certain  to  be  followed  by  a  period  of  dis- 


44   MONEY  TAKEN  BY  BORROWING    [chap. 

location  and  uncertainty  in  which  industry  should 
be  as  free  as  possible  to  contend  with  the  difficulties 
that  face  it,  and  should  therefore  be  as  little  as 
possible  burdened  by  taxes  that  have  to  be  paid  to 
debt-holders.     Let  us  consider  these  assertions. 

( I )  Taxation  is  more  easily  raised  in  war  than  in 
peace,  for  the  obvious  reason  that,  the  nation  being 
patriotically  stirred  by  some  cause  affecting  its 
honor  or  its  existence,  or  both,  its  citizens  are 
readier  to  hand  over  their  money  to  Government. 
In  an  ideally  educated  nation  with  an  ideal  system 
of  taxation  and  an  ideal  Government  that  could  be 
trusted  not  to  waste  its  money,  this  difference  would 
perhaps  not  appear,  because  under  these  circum- 
stances the  citizens  would  always  be  ready  and 
willing  to  pay  by  taxation  for  objects  that  the 
nation  had  decided  to  be  desirable.  But  as  things 
are,  many  people  in  ordinary  times  grudge  the 
money  that  they  have  to  pay  in  taxes,  partly  be- 
cause they  have  not  been  taught  to  see  that  the 
common  good  is  their  good  and  that  they  ought  to 
contribute  to  it  gladly,  partly  because  they  often  have 
a  suspicion  that  they  are  being  taxed  too  much  and 
their  neighbors  too  little,  and  partly  because,  in  Eng- 
land, there  is  a  general  suspicion,  not  to  say  con- 
viction, that  a  large  part  of  any  money  which  the 
Government  spends  is  wasted,  owing  to  the  ex- 
cessive cost  of  it's  cumbrous  machinery.  In  war-time 
these  considerations  have  much  less  weight,  and 
Englishmen  when  they  pay  an  extra  price  for  their 
tobacco  or  tea,  or  draw  a  bigger  cheque  for  the 


II]  TAXATION'S  ADVANTAGES  45 

King's  taxes,  feel  that  they  are  putting  something 
into  the  Treasury  for  a  great  cause,  or  for  the 
national  honor,  or  to  "keep  the  old  flag  flying," 
or  to  "help  the  boys  at  the  front"  who  are  fighting 
for  them,  or  just  that  "it's  war-time,"  and  there's 
an  end  of  it.  At  such  a  time  a  Government  con- 
fident in  its  cause,  and  in  the  readiness  of  the  citizens 
to  back  it,  could,  I  believe,  take  a  much  greater 
part  of  the  nation's  income  in  taxes  than  has  been 
attempted  yet.  ~       ^ 

(2)  Taxation  is  less  hindrance  to  industry  in 
time  of  war,  because  war  in  many  ways  simplifies 
the  task  of  industry.  Industry  knows  more  exactly 
what  it  has  to  produce,  and  has  a  better  and  more 
certain  market.  Its  difficulty  is  to  get  enough  men 
to  do  the  work,  and  stuff  to  put  into  it.  At  home 
there  is  the  Government  wanting  more  war  mate- 
rial than  can  be  turned  out.  Abroad  there  are  neu- 
trals full  of  money  that  they  are  making  out  of 
selling  things  to  the  warring  Governments,  want- 
ing to  buy  stuff  that  they  used  to  get  from  us  and 
our  trade  competitors — now  busy  on  war  work — 
and  unable  to  supply  their  wants.  The  manufac- 
turer has  more  certainty  that  he  will  be  able  to  sell 
at  a  good  profit  whatever  he  can  turn  out,  and 
he  is  consequently  less  likely  to  have  his  enterprise 
checked  by  the  existence  of  high  taxation.  He  is 
so  certain  to  be  able  to  take  his  taxes  out  of  his 
customers  that  taxation,  under  such  conditions, 
hardly  weighs  with  him. 

(3)  Taxation  in  war-time  is  twice  blessed.     It 


46  MONEY  TAKEN  BY  BORROWING    [chap. 

gives  the  Government  revenue  and  it  checks  the 
consumption  of  the  individual,  and  this  is,  at  such 
a  time,  an  equally  important  economic  advantage. 
Because  owing  to  the  enormous  demands  of  the 
Government  on  the  available  supply  of  goods  and 
services  there  are  not  enough  to  go  round,  and  if 
the  citizens  try  to  enjoy  their  usual  allowance  of 
comforts  and  amusements — none  of  which  can  be 
provided  without  using  up  a  certain  amount  of  labor 
and  of  stuff,  and  probably  of  coal  in  transport — 
the  result  is  that  the  Government  and  the  indi- 
vidual citizens  compete  against  one  another  in  a 
limited  market  and  force  up  the  price  of  every- 
thing to  their  mutual  disadvantage,  and,  what  is 
worse,  to  the  great  disadvantage  of  all  whose  wages 
or  incomes  have  not  risen  as  fast  as  the  rise  in 
prices  has  moved.  It  may  be  objected  that  borrow- 
ing checks  consumption  just  as  efficiently  as  taxa- 
tion, since  people  cannot  spend  what  they  lend. 
This  is  true  if  all  the  money  lent  is  saved,  and  is 
not  produced  by  borrowing  or  inflation,  a  subject 
to  be  dealt  with  in  the  next  chapter.  But  even  so, 
when  money  is  taken  in  taxes  and  not  in  loans, 
people  are  likely  to  be  thereby  stimulated  to  save 
something  besides.  As  we  have  seen,  if  a  man  puts 
$5,000  into  a  Government  loan,  he  thinks  he  has 
got  an  asset  and  forgets  that  it  also  involves  a 
liability.  If  $5,000  is  taken  from  him  in  taxes, 
he  is  likely,  if  at  all  thriftily  inclined,  to  try  to 
put  something  away  besides. 

Further,  borrowing  in  war-time  has  this  great  dis- 


II]  PENALIZING  PATRIOTISM  47 

advantage,  that  it  penalizes  those  who  go  to  the 
front.  Doctors  who  give  up  fine  practices  and  take 
a  pittance  as  military  surgeons,  business  men, 
mechanics  and  miners  who  forsake  big  profits  and 
high  wages  for  the  pay  of  officers  and  privates, 
come  back  when  the  war  is  over  and  find  that  the 
comrades  and  competitors  whom  they  left  behind 
have  made  big  investments  in  war  loans,  and  that 
they,  whose  pay  has  enabled  them  to  do  little  or 
nothing  in  this  direction,  will  be  subject  to  higher 
taxation  to  pay  them  interest.  The  system  thus 
directly  fines  those  who  do  the  most  important  war 
work. 

For  all  these  reasons  taxation  in  time  of  war  is 
greatly  preferable  to  borrowing,  and  this  is  still 
more  so  when  we  consider  war's  aftermath.  Every 
million  that  we  pay  in  taxes  in  war-time  means  that 
there  is  a  million  less  of  debt  to  be  dealt  with  when 
peace  comes,  and  consequently  so  much  more  taxa- 
tion to  be  taken  off,  just  at  the  very  time  when  taxa- 
tion will  be  the  greatest  nuisance.  Because  when 
peace  brings  the  tremendous  problem  of  putting  our 
industry  back  on  to  peace  work,  with  uncertain 
markets  and  all  kinds  of  queer  problems  that  are 
certain  to  arise,  it  is  above  all  necessary  that  our 
producers  and  merchants  shall  feel  bold  and  confi- 
dent and  ready  to  set  the  whole  machine  going  in 
the  good  hope  of  bigger  production  and  readier 
consumption  than  ever  have  been  seen  before  in 
peace  time.  High  taxes,  due  to  a  big  debt  charge 
produced  by  home  borrowing,  will  only  go  out  of 


48   MONEY  TAKEN  BY  BORROWING    [chap. 

one  pocket  into  another,  but  the  taxpayers  will 
not  all  recognize  this,  and  if  they  are  not 
also  debt-holders  it  will  not  console  them  if  they 
do.  So  that  if  taxes  have  to  be  kept  on  at  the 
war  level,  or  even  raised,  in  peace  time,  the  great 
recovery  in  trade  with  which  I  hope  that 
England  may  astonish  the  world  even  more  than 
by  anything  that  she  has  done  during  the  war, 
may  be  seriously  impeded,  especially  if  there  is 
discontent  and  bad  feeling  in  the  country  about 
the  manner  in  which  the  burden  of  taxation  is  im- 
posed. The  Germans,  who  have  raised,  ^o  far,  a 
quite  contemptible  part  of  the  war  cost  by  taxation, 
are  likely  to  find  themselves  seriously  hampered 
when  peace  comes  by  the  problem  that  they  are  thus 
creating  for  themselves. 

For  these  reasons  borrowing  at  home  in  war-time 
is  not  a  policy  that  commends  itself  on  economic 
grounds.  The  extent  to  which  it  is  practised  may 
be  taken  as  a  measure  of  the  want  of  confidence  of 
the  Government  in  itself  or  in  the  readiness  of  the 
people  to  make  sacrifices  for  the  war,  or  of  its  mere 
thoughtless  following  of  a  bad  habit  handed  down 
by.  its  predecessors. 

^  A  well-informed  and  benevolent  despot,  with  a 
perfectly  docile  people,  would  see  that  if  there  js 
money  in  the  country  that  he  can  get  by  borrowing 
he  can  also  get  it  by  taxing  if  he  sets  about  it  in  the 
right  way,  and  that  by  doing  so  he  not  only  cheapens 
the  war  by  reducing  his  subjects'  demand  for  goods 
which  competes  with  that  of  his  War  Minister,  but 


II]  THE  BENEVOLENT  DESPOT  49 

also  makes  industrial  recovery  in  peace  more  rapid 
and  hearty,  by  the  absence  of  after-war  taxation. 
All  the  money  that  he  wanted  for  war  he  would  just 
take  from  his  people  in  taxes  as  the  war  went  on, 
without  going  through  the  cumbrous  process  of 
borrowing  it  from  them  and  afterwards  taxing  them 
to  pay  themselves  back.  But  in  order  to  do  so  he 
would  have  to  be  able  to  rely  on  a  truly  equitable 
system  of  taxation,  which  would  curtail  the  power 
even  of  the  richest  to  waste  money  on  things  that 
are  not  really  needed  at  a  time  of  national  crisis, 
without  taking  food  out  of  the  mouths  and  clothes 
off  the  backs  of  those  who  are  hungry  and  ill-clad. 
Borrowing  at  home  in  time  of  peace  for  some 
purpose  that  is,  as  Adam  Smith  said,  of  great  na- 
tional advantage,  but  not  likely  to  pay,  is  less  objec- 
tionable than  war  borrowing,  since  the  special 
advantages,  set  out  above,  of  taxation  over  borrow- 
ing that  prevail  in  war-time  are  then  absent.  But 
it  is  always  dangerous,  because  it  encourages  the 
delusion  that  a  nation  can  have  things  now  and 
pay  for  them  some  day,  whereas  whatever  it  has  now 
it  pays  for  now  if  it  raises  the  money  at  home,  and 
the  simplest,  cleanest,  and  most  honest  way  of  pay- 
ing for  it  is  by  taxation.  In  the  case  of  revenue- 
earning  enterprises  there  is  very  little  objection  to 
borrowing  for  their  cost  if  the  revenue  is  likely  to 
cover  the  debt  charge ;  but  since  it  is  generally  ad- 
mitted that  such  enterprises  are  more  costly,  in 
most  countries,  when  managed  by  Government,  the 


;^*  ti 


\-j 


50   MONEY  TAKEN  BY  BORROWING    [chap. 

economic  argument  against  their  being  so  managed 
is  strong. 

borrowing  abroad,  except  for  reproductive  pur- 
poses such  as  railway  building,  is  so  evidently  "bad 
business"  that  it  is  only  done  by  Governments  of 
economically  backward  countries,  or  by  Govern- 
ments which  are  impelled  into  this  course,  against 
their  will,  by  the  force  of  circumstances,  as  happened 
to  England's  in  the  present  war.  The  volume  of 
munitions  and  war  goods  required  for  her  and  for 
her  Allies  was  so  great  that  she  had  not  the  plant 
ready  to  provide  them  fast  enough,  so  she  had  to 
buy  them  from  neutrals.  As  her  industry  was  de- 
pleted of  its  best  men  and  had  more  work  to  do  than 
it  could  manage,  it  was  not  possible  to  pay  for  these 
war  imports  by  increasing  the  volume  of  goods  and 
services  that  she  exported.  So  she  was  obliged  to 
make  these  payments  by  drawing  on  her  accumu- 
lated capital  and  by  pledging  her  future  production. 
Some  of  her  accumulated  capital  was  in  the  form  of 
the  bonds  and  shares  of  American  railroads  and  of 
Government  and  municipal  bonds  of  many  neutral 
countries,  which  had  been  acquired  by  her 
through  the  process  of  investment  abroad,  that  is 
by  providing  goods  and  services  in  the  past  and 
taking  securities  in  exchange  for  them.  These  for- 
eign investments  stood  her  in  good  stead  since  she 
was  able  to  ship  them  back  to  the  country  of  origin, 
or  to  others  that  would  take  them,  in  exchange  for 
war  imports.  By  this  means  she,  as  a  nation,  paid 
for  part  of  the  war's  cost  out  of  work  done  in 


>> 


II]  BORROWING  ABROAD  51 

former  years,  by  using  it  to  induce  foreigners  who 
bought  the  securities  to  pay,  during  the  war,  other 
foreigners  who  were  supplying  her  with  goods  and 
services  needed  for  it.  By  so  doing  she  deprived 
herself  for  the  future  of  the  stream  of  goods  and 
services  that  she  used  to  receive  from  foreign  coun- 
tries to  meet  the  interest  on  and  redemption  of  these 
securities  that  she  had  acquired  in  former  years. 
This  process  has  very  much  the  same  effect  as  bor- 
rowing abroad,  which  was  another  means  employed 
by  the  British  Government  for  financing  the  war. 
For  example,  when  it  raised  a  loan  of  250  millions 
in  America  it,  in  effect,  hired  certain  American  in- 
vestors to  pay  now  for  the  munitions,  etc.,  that  it 
was  importing,  promising  to  pay  them  in  future  so 
much  a  year  in  interest.  This  interest  England  will 
have  to  provide  out  of  her  annual  production  of 
goods  and  services.  So  that  both  these  processes  of 
financing,  by  selling  securities  and  by  borrowing 
abroad,  mean  that  she  will  have  to  work  harder  in 
future  to  provide  for  her  own  wants,  for  one  reduces 
the  payments  that  folk  abroad  have  to  make  to  her 
and  the  other  increases  the  payments  that  she  has  to 
make  to  them.  But  it  may  be  noted  that  the  extent 
to  which  she  has  made  use  of  these  methods  of  pay- 
ing for  war  is,  so  far,*  roughly  balanced  by  the  loans 
that  she  has  made  to  her  Allies  and  Dominions. 

*  Written  in  March  1917. 


CHAPTER  III 

MONEY  WATERED  BY  INFLATION 

In  the  good  old  medieval  days  rulers  who  wanted 
more  money  than  they  could  squeeze  out  of  their 
subjects  by  taxing  used  often  to  solve  the  prob- 
lem by  debasing  the  coinage.  This  was  most  easily 
and  effectively  done  by  putting  less  precious  metal 
and  more  alloy  into  coins  and  then  issuing  them  in 
payment  with  all  the  appearance  of  having  the  same 
value  as  before.  By  this  process  the  monarch  was 
able  to  make  a  given  amount  of  gold  or  silver  go  so 
much  further  in  turning  it  into  pieces  that  their 
unsuspecting  subjects  would  take  in  exchange  for 
goods,  until  the  fraud  was  discovered  and  prices 

/   adjusted  themselves,  more  or  less. 

V  Nowadays  most  commercial  transactions,  except 
the  retail  purchases  on  which  we  spend  our  pocket- 
money,  are  carried  out  by  means  of  various  forms 
of  paper  money,  the  most  important  of  which,  in 
England,  is  the  cheque  currency  with  which  our 
banking  system  provides  us.  Before  the  war,  we 
'  used  to  carry  gold  and  silver  coins  for  retail  pur- 
!  poses,  but  even  then  all  big  payments  were  made 
■■  52 


[chap.  Ill]     MULTIPLYING  PAPER  53 

by  cheque.  Since  the  war,  gold  has  practically  van- 
ished from  circulation,  and  its  place  has  been  taken 
by  Treasury  notes,  issued  under  the  Currency  and 
Bank  Notes  Act  of  19 14,  and  convertible  on  de- 
mand into  gold  at  the  Bank  of  England.  This 
power,  that  a  modern  community  has  gained,  of 
multiplying  its  currency  by  means  of  the  printing 
press  and  of  banking  machinery,  makes  it  easy  for 
Governments  when  they  want  money  and  are  shy 
of  taking  it  directly  and  openly  out  of  the  pockets 
of  the  citizens,  to  debase  the  currency,  not  by  fraud- 
ulently tampering  with  it  in  the  medieval  manner, 
but  by  merely  multiplying  the  amount  of  the  paper 
instruments  that  will  be  taken  by  the  public  in 
exchange  for  goods.  The  buying  power  of  the 
public  is  thus  watered  down  by  inflation,  if  this 
mixture  of  metaphors  may  be  permitted.  This  is 
a  very  tempting  and  attractive  method  of  financing 
any  expensive  enterprise,  especially  a  war,  because 
it  does  not,  at  first  sight,  call  upon  any  one  for  any 
such  sacrifice  as  is  involved  when  taxes  are  raised 
or  when  the  citizens  are  called  upon  to  limit  their 
spending,  save  their  money  and  lend  it  to  the  State. 
By  increasing  the  currency  a  Government  does  not 
take  money  out  of  anybody's  pocket,  but  puts  new 
money  into  the  pockets  of  those  to  whom  it  has  to 
make  payments.  It  seems  to  be  a  delightfully  easy 
and  simple  way  of  paying  for  things,  just  to  manu- 
facture new  money  for  the  purpose,  and  this  device 
is  in  fact  the  basis  for  all  kinds  of  schemes  by  which 
well-meaning  currency  reformers  often  believe  that 


54  MONEY  WATERED  [chap. 

they  can  make  mankind  rich,  by  increasing  the 
volume  of  the  medium  by  which  payments  are  ef- 
fected; whereas  the  only  way  by  which  we  can 
be  made  really  better  off  is  by  increasing  the  supply 
of  things  that  we  need  and  improving  the  system  by 
which  they  are  distributed  among  us.  In  fact  the 
effect  of  an  increase  of  currency,  unless  it  is  accom- 
panied by  an  increase  in  the  output  of  goods,  is 
just  the  same  as  that  of  the  medieval  debasement. 
It  tends  to  produce  a  rise  in  the  prices  of  all  com- 
modities in  general  use,  and  so  throws  the  burden  of 
paying  for  war,  or  providing  whatever  be  the  object 
that  the  Government  is  trying  to  secure,  on  the 
shoulders  of  the  people  least  able  to  bear  it — namely, 
ill-paid  workers  and  salary  earners  and  people  with 
small  fixed  incomes.  It  is  a  devious,  unscientific, 
and  round-the-corner  dodge,  and  can  only  be  ex- 
cused on  the  ground  that  Governments  make  use 
of  it  without  realizing  what  they  are  doing,  and 
then  continue  it  because,  when  once  it  is  started, 
it  is  very  difficult  to  stop  it,  or  even  to  check  its 
growth. 

It  is  simply  finance  by  inflation.  The  subject  is 
difficult  and  technical,  and  to  enter  into  all  its  in- 
tricacies would  involve  us  all  in  much  confusion 
and  weariness  of  mind,  and  would  also  fill  out  a 
portly  volume.  But  if  we  keep  to  the  broad  outlines 
of  the  matter,  it  seems  to  me  that  the  case  against 
it  is  plain  to  the  understanding  and  convincing  to 
common  sense.  Professor  Foxwell,  in  the  course 
of  a  lecture  on  Inflation,  lately  gave  an  excellent 


Ill]       DR.  JOHNSON  ON  CURRENCY        55 

illustration  of  the  effect  of  the  quantity  of  currency 
on  prices  from  a  remark  of  Dr.  Johnson's.  When 
told  that  in  Skye  twenty  eggs  might  be  bought  for 
a  penny,  Johnson  observed :  "Sir,  I  do  not  gather 
from  this  that  eggs  are  plenty  in  your  miserable 
island,  but  that  pence  are  few."  There  it  is  in  a 
nutshell.  If  currency,  is  scarce,  prices  are  low.  If 
it  is  plentiful,  prices  are  high.  By  inflation  I  mean 
an  increase  in  the  currency  more  rapid  than  in  the 
volume  of  commodities  and  services  that  the  com- 
munity is  producing.  When  this  takes  place,  if  at 
the  same  time  what  is  called  the  velocity  of  the 
circulation — that  is,  the  pace  at  which  money  is 
turned  over — remains  the  same,  it  is  impossible  to 
avoid  the  conclusion  that  a  rise  in  prices  must  hap- 
pen. Let  us  see  the  process  at  work  in  an  imaginary 
example. 

If  we  all  woke  up  one  morning  to  find  that  some 
well-meaning  fairy  had  doubled  the  amount  of 
money  in  our  pockets  and  in  our  banking  accounts, 
and  if  at  the  same  time  no  more  stuff  and  services 
were  being  produced,  we  should  all,  probably,  feel 
nice  and  rich  until  we  found  out  that  everybody 
else's  money  had  also  been  doubled;  then  if  at  the 
same  time  there  were  no  increase  in  the  things  that 
money  is  used  to  buy,  the  stress  of  competition 
would  make  the  price  of  everything  shoot  up  like  a 
rocket.  If  the  price  of  everything,  including  labor, 
services  and  capital,  were  exactly  doubled,  then  we 
should  all  be  exactly  as  we  had  been  before,  with 
regard  to  our  power  to  buy ;  but  in  fact  there  would 


56  MONEY  WATERED  [chap. 

be  a  painful  process  of  adjustment  in  which  those 
who  were  strongest  in  bargaining  power  would  do 
best  out  of  the  scramble  and  the  weakest  would  fare 
worst.  Moreover,  those  who  had  made  investments 
in  house  property,  mortgages  or  securities,  entitling 
them  to  so  many  dollars  a  year  for  a  term  of  years 
or  for  all  time,  would  find  that  the  buying  power  of 
their  so  many  dollars  had  been  greatly  lessened, 
but  that  they  had  no  right  to  make  their  tenants  or 
their  debtors  pay  them  more  than  was  stipulated 
in  the  original  contract.  The  result,  then,  of  such 
an  increase  in  the  currency  as  we  have  imagined 
would  be  a  great  upsetting  of  the  community's 
economic  relations,  with  a  rise  in  prices  followed  by 
a  rise  in  wages  for  those  who  were  strong  enough 
to  secure  it,  probably  much  friction  and  many  strikes 
before  this  adjustment  was  secured,  a  good  deal 
of  injustice  to  unorganized  workers  and  people 
like  clerks  and  typists  who  are  too  respectable  to 
strike,  and  a  very  unfair  advantage  to  debtors,  who 
would  be  able  to  pay  interest  and  repay  capital  to 
creditors  in  currency  that  had  been  debased  to  the 
extent  of  about  half  its  value. 

If  inflation  took  place  on  this  wholesale  scale,  we 
should  all  see  at  once  what  was  happening,  but  of 
course  it  does  not.  It  is  usually  done,  even  in  times 
of  acute  crisis,  so  gradually  that  its  effect  is  not 
observed  until  it  is  too  late  to  remedy  the  evil  by 
drastic  measures,  without  raising  a  fresh  crop  of 
awkward  problems.  In  normal  times  inflation  is, 
as  a  rule,  only  practiced  on  a  very  modest  scale, 


Ill]  THE  GUERNSEY  MARKET  57 

though  it  is  said  that  there  have  been  examples  of 
economically  backward  States  that  worked  the  print- 
ing- press  so  hard  that  at  last  their  paper  became 
so  worthless  that  it  did  not  even  pay  to  print  it. 
If  inflation  really  has  the  excuse,  like  the  unauthor- 
ized baby,  of  being  "only  a  very  little  one,"  its 
effect  is  hardly  noticeable,  and  it  appears  to  work 
a  very  comfortable  miracle.  There  is  the  famous 
example,  referred  to  in  Jevons's  book  on  Money, 
Chapter  XVI,  of  the  Guernsey  market,  which  was 
"built  without  apparent  cost."  The  Governor  of  the 
island  wanted  to  build  a  market,  and,  not  having 
the  wherewithal,  "issued  under  the  seal  of  the 
island  four  thousand  market  notes  for  one  pound 
each,  with  which  he  paid  the  artificers.  When  the 
market  was  finished  and  the  rents  came  in,  the 
notes  were  thereby  canceled."  The  whole  trans- 
action was  completed,  and  the  market  had  seem- 
ingly been  built  out  of  nothing.  In  fact  it  had 
been  built  by  means  of  temporary  inflation,  the 
effect  of  which  would  tend  to  raise  the  prices  of  all 
the  goods  that  the  community  was  consuming. 
Jevons  indeed  considers  that  the  infusion  of  those 
notes  into  the  currency  drove  out  so  much  gold.  If 
that  really  happened,  then  there  would  be  no  infla- 
tion, because  paper  would  have  taken  the  place  of 
gold  in  circulation  and  there  would  have  been  no 
increase  in  the  total  currency  in  the  hands  of  the 
;  Guernsey  folk.  But  Jevons  does  not  state  that 
^  gold  was,  in  fact,  actually  driven  out;  and  with 
I    all   deference   to   his   authority,    the   explanation 


58  MONEY  WATERED  [chap. 

of  the  miracle  given  above  seems  to  me  more 
probable. 

In  order  to  avoid  misunderstanding,  I  think  it  is 
better  to  make  it  clear  that  by  inflation  I  mean 
any   increase  in   any   form   of   currency,   whether 
metallic,  legal  tender,  or  other — coins,  bank  notes, 
postal  orders,  or  clieques — that  is  accepted  in  pay- 
\  ment  by  the  community.     It  is  quite  possible  to 
'  have  inflation  by  too  great  an  inrush  of  gold,  as 
several  neutral  countries  have  found  in  the  course 
of  the  present  war.    But  when  it  is  a  matter  of  too 
.much  gold,   then   equilibrium   can   be   restored   in 
ordinary  times  by  the  export  of  the  gold,  because 
it  will  be  taken  in  payment  elsewhere;  but  a  coun- 
try's paper  money  is  not  available  as  an  article  of 
export. 

In  normal  times,  such  inflation  as  we  are  liable 
to  is  usually  corrected  by  gold  exports  and  the 
operation  of  other  economic  processes.  If  a  coun- 
try's currency  system  is  sound,  the  inflation  process 
should  thus  carry  its  own  remedy  with  it.  In  Eng- 
land's case,  if  we  get  in  too  much  gold,  or  our  banks 
create  too  much  cheque  currency,  the  consequent 
rise  in  prices  tends  to  check  our  exports  and  in- 
crease our  imports  of  goods.  Thereby  in  the  first 
place  the  volume  of  goods  offered  in  our  home  mar- 
kets increases  and  so  the  relation  between  goods  and 
currency  is  helped  to  return  to  the  former  level,  and 
in  the  second,  as  we  are  importing  more  goods  and 
exporting  less,  there  is  a  tendency  for  gold  to  be 
shipped  to  pay  for  some  of  the  extra  imports.     So 


Ill]         UNCHECKED  IN  WAR-TIME  59 

that  if  we  are  suffering  from  too  much  gold,  the 
cure  begins  to  work;  or  if  it  is  a  case  of  too  much 
banking  credit,  the  export  of  gold  calls  attention 
to  the  diminished  basis  of  this  credit  and  so  helps  to 
cure  it. 

—  In  war-time,  if  the  war  is  big  and  obtrusive 
enough,  these  nice  and  pretty  checks  and  balances  do 
not  work  to  keep  inflation  down.  Shipping  gold  is 
made  expensive  by  high  rates  of  freight  and  in- 
surance, and  the  people  who  usually  handle  the 
business  of  shipping  gold,  and  do  so,  in  peace  time, 
whenever  they  can  see  a  profit  in  it  and  sometimes 
merely  to  get  the  advertisement  that  gold  ship- 
ments usually  bring  with  them,  are  checked  by 
patriotic  motives  and  the  desire  to  avoid  export- 
ing a  financial  weapon  which  has  to  be  kept  for 
special  uses.  And  so  inflation  can  proceed 
merrily  without  setting  to  work  the  automatic  mech- 
anism that  usually  produces  the  antidote  for  the 
disease. 

How  merrily  inflation  can  work,  when  it  is  thus 
given  its  head,  the  experience  of  the  present  war 
has  well  shown.  All  the  warring  countries  in  Eu- 
'':'  rope  have  been  calling  in  gold  from  circulation  and 
,<Teplacing  it  with  a  much  larger  quantity  of  paper. 
Much  of  the  gold  that  they  have  called  in  they  have 
shipped  to  neutral  countries  to  pay  for  goods,  and  so 
all  over  the  world  there  is  this  common  experience 
of  an  increase  in  currency  over  and  above  the  supply 
of  goods,  and  a  more  or  less  universal  rise  in  prices. 
The  thing  has  gone  to  such  a  pitch  that  the  Scandi- 


rt 


60  MONEY  WATERED  •  [chap. 

navian  countries  have  in  effect  closed  their  ports 

against  the  entry  of  gold,  and  in  America  the  danger 

of  the  inflation  produced  by  the  great  mass  of  gold 

.  '     imported  has  long  been  a  commonplace  among  eco- 

'  ^  nomic  writers. 

The  method  of  inflation  differs  in  each  country 
according  to  the  arrangements  of  its  currency  sys- 
tem. During  the  present  war  England  is  doing 
it  in  three  or  perhaps  four  ways.  The  Govern- 
ment has  done  it  by  printing  paper  currency,  much 
greater  in  extent  than  the  gold  which  it  has  replaced 
in  circulation,  and  by  minting  a  great  quantity  of 
?{;i  *  silver.  The  Bank  of  England  has  done  it  by  lend- 
^^  ing  money  to  the  Government,  to  Allies,  to  Colo- 
nial Governments,  and  to  private  individuals;  and 
the  other  banks  have  done  it  by  increasing  their 
investments  in  Government  securities  and  by  mak- 
ing advances  to  customers  in  order  to  enable  them 
to  take  up  Government  securities.  In  other  words, 
most  of  the  inflation  has  been  due  chiefly  to  the  ac- 
tion of  the  Government  in  either  directly  increasing 
the  currency  itself  by  printing  or  coining  it,  or  in 
borrowing  money  from  the  Bank  of  England  and 
the  other  banks  instead  of  getting  it  out  of  the 
pockets  of  the  public  by  taxing  it  or  borrowing  its 
savings.  It  is  entirely  natural  that  the  British  Gov- 
ernment should  have  done  this,  because  in  peace  time 
it  does  so  habitually  and  as  part  of  its  regular 
:  scheme  of  finance.  It  borrows  from  the  Bank  of 
'  England  on  Deficiency  or  Ways  and  Means  advances 
to  tide  it  over  a  time  when  taxes  are  coming  in 


[ 


III]        CURRENCY  MADE  BY  BANKS       6i 

sluggishly,  and  on  the  other  hand  big  payments  have 
to  be  made,  and  for  like  reasons  it  sells  Treasury 
bills,  or  temporary  promises  to  pay,  to  the  Bank  of 
England,  or  to  other  banks.  These  devices  are, 
usually,  on  so  small  a  scale,  as  compared  with  the 
vast  sum  of  our  monetary  turnover,  that  the  conse- 
quent addition  to  our  currency  has  no  noticeable 
effect.  But  the  huge  scale  on  which  they  have 
been  used  in  this  war  has  had  bad  results  for  all 
parties.  -— 

As  many  people  may  be  puzzled  by  the  assertion 
that  the  Government  increases  the  currency  by  bor- 
rowing from  banks,  it  is  better  to  explain  the 
process  briefly  here,  though  in  another  book  I  have 
already  shown  how  loans  made  by  banks  produce 
manufactured  money  by  adding  to  the  banks'  de- 
posits, which  embody  the  right  of  their  customers 
to  draw  the  cheques  which  are  the  chief  form  of 
currency  that  we  now  use.^ 

When  the  Bank  of  England  makes  a  loan  to  the 
Government  or  subscribes  to  any  issue  of  Govern- 
ment security,  it  increases  its  holding  of  Govern- 
ment securities  as  shown  in  its  weekly  return.  When 
it  makes  advances  to  any  less  august  borrower,  it 
increases  its  holding  of  what  it  calls  Other  Securi- 
ties. In  either  case  it  increases,  on  the  other  side  of 
its  return,  the  amount  of  its  deposits,  which,  as  the 
appended  specimen  shows,  are  divided  into  Public 
:  and  Other,  the  former  being  the  balances  of  the 
various   departments   of  the  British   Government, 

*  Meaning  of  Money,  pp.  64  et  seq. 


62  MONEY  WATERED  [chap. 

and  the  latter  those  of  all  other  depositors,  includ- 
ing the  other  banks : 

BANK  OF  ENGLAND 

Banking  Department 
July  ist,  1914 

Million  £ 

Government  Securities .     11 
Other  Securities    .        .    49J^ 
Reserve  ....    28^ 


Million  £ 

Capital    . 

.     H'A 

Rest 

.      3J4 

Public  Deposits    . 

.   17 

Other 

.    54^ 

89^ 

89^ 

Any  one  to  whom  the  Bank  of  England  makes 
an  advance  thereby  gets  a  credit  in  its  books,  and 
so  the  amount  of  the  deposits  at  the  Bank  is  in- 
creased by  the  amount  of  the  advance.  If  the  Brit- 
ish Government  is  the  borrower,  the  advance  is 
added  both  to  the  Government  Securities  among  the 
assets  and  to  the  Public  Deposits  among  the  liabili- 
ties ;  but  as  the  Government  does  not  borrow  money 
in  order  to  have  the  pleasure  of  contemplating  a 
large  balance  at  its  banker's,  it  sooner  or  later  makes 
payments,  out  of  this  deposit,  to  contractors  or 
other  folk  to  whom  it  owes  money,  by  means  of 
cheques  on  the  Bank  of  England;  the  contractors 
pay  these  cheques  into  their  own  banking  accounts, 
and  so  the  money  originally  lent  by  the  Bank  of 
England  to  the  Government  is  transferred  from  the 
Public  to  the  Other  Deposits,  to  the  credit  of  the 
other  banks  to  whom  it  has  been  distributed,  and 
henceforward  it  figures  as  cash  at  the  Bank  of  Eng- 
land in  their  balance  sheets.  If  the  Bank  of  England 


Ill]        CURRENCY  MADE  BY  BANKS        63 


makes  an  advance  to  any  other  borrower,  he  is  cred- 
ited with  a  corresponding  deposit.  He  draws  on  it 
and  transfers  it  to  any  one  to  whom  he  has  to  make 
payments,  but  the  deposit  remains  to  the  credit  of 
some  one  as  long  as  the  advance  is  outstanding. 
How  far  this  process  has  been  carried  we  see  from 
the  figures  of  the  Bank  of  England's  returns  pub- 
lished at  the  end  of  last  year,  comparing  with  those 
at  the  end  of  June  1914,^  given  on  a  previous  page: 

Banking  Department 

December  27th,  1916 


Million  £ 

Million  £ 

Capital    . 

.      143^ 

Government  Securities .    57 

Rest 

.      3J4 

Other  Securities  .        .  io6j^ 

Public  Deposits     . 

.  52 

Reserve  .        .        .        -33 

Other 

.  I26M 

1961^ 

196^ 

Here  we  see  an  addition  of  more  than  100  mil- 
lions to  both  sides  of  the  balance  sheet,  by  in- 
creases in  the  securities  on  one  hand  and  in  the 
deposits  on  the  other.  These  deposits  are  potential 
currency  and  more,  for  being  "cash  at  the  Bank  of 
England,"  in  the  hands  of  the  other  banks  they  are 
regarded  as  just  as  good  a  reserve  for  them  as  gold 
or  legal  tender.  Let  us  see  the  effect  on  the  other 
banks  of  this  increase  in  the  currency  which  may 
be  called,  in  a  sense,  part  of  the  basis  of  their  credit 
operations.  I  append  an  aggregate  balance  sheet 
of  nineteen  of  the  biggest  English  banks,  showing 
*  These  dates  are  chosen  to  fit  those  of  the  balance  sheets 
of  the  other  banks,  vi^hich  are  only  published  half-yearly. 


64 


MONEY  WATERED 


[chap. 


their  position  first  on  June  30th,  1914,  the  last  date 
on  which  they  were  published  before  the  war,  and 
then  on  December  31st,  1916: 

Aggregate  Balance  Sheets  of  Nineteen  Principal 
English  Banks 

June  30th,  1914 


Capital  and  Re- 
serves        .        .    69,864,000 

Acceptances  and 
Endorsements    .     37,646,000 

Deposits  (includ- 
ing undivided 
profits,  etc.)       .  747,243,000 


i8s4,753,ooo 


Cash  in  hand  and 
at   bank     .        .  115,242,000 

Investments  .  114,583,000 

Discounts  and  Ad- 
vances (includ- 
ing Money  at 
Call,  etc.)  .        .  571,451,000 

Cover  for  Accept- 
a  n  c  e  s,  P  r  e- 
mises,  and  Sun- 


dries 


•    53.477,000 
;£854,753,ooo 


December  2'^stj  1916 


Capital  and  Re- 
serves 

Acceptances  and 
Endorse- 
ments 

Deposits  (in- 
cluding u  n- 
divided  p  r  o- 
fits,  etc.) 


72,497,000 


57,498,000 


1,095,574,000 


£1,225,569,000 


Cash  in  hand  and 
at  bank  . 

Investments 

Discounts  and 
Advances  (in- 
cluding Money 
at  Call,  etc)  . 

Cover  for  Ac- 
ceptances, Pre- 
m  i  s  e  s,  and 
Sundries 


251,875,000 
303,461,000 


592,056,000 


78,177,000 


£1,225,569,000 


Ill]  POTENTIAL  CURRENCY  65 

The  most  notable  features  In  this  very  instructive 
comparison  are  the  increases  in  the  deposits  on  the 
liabihties  side  and  in  the  cash  and  investments 
among-  the  assets,  that  has  taken  place  during  the 
period.  It  will  be  observed  that  the  deposits,  which 
are  potential  currency  in  the  hands  of  the  public, 
since  they  give  the  banks'  customers  the  power  to 
draw  cheques  against  them,  have  risen  by  348  mil- 
lions, while  the  cash  held  by  the  banks  has  risen 
by  136  millions,  their  investments  by  189  millions, 
and  their  loans  and  discounts  by  21  millions.  How 
much  of  the  addition  to  the  cash  is  due  to  the  Bank 
of  England's  lending  activities,  as  described  above, 
how  much  to  the  issue  of  Treasury  notes,  of  which 
150  millions  sterling  were  outstanding  on  Decem- 
ber 31st  last,  and  how  much  to  gold  paid  in  by 
customers,  it  is  impossible  to  guess,  but  it  is  safe 
to  assume  that  these  three  processes  between  them 
have  done  most  of  it.  But  a  still  larger  move- 
ment is  the  increase  in  investments,  the  whole  of 
which,  it  is  safe  to  guess,  has  been  due  to  the  big 
subscriptions  made  by  the  banks  to  the  two  first 
War  Loans,  and  to  Exchequer  bonds  and  Treasury 
bills,  by  means  of  which  they  increase  on  the  one 
hand  their  investments  and,  on  the  other,  the  de- 
posits of  their  customers, — by  this  process.  When 
they  subscribe  to  War  Loans  or  buy  Treasury  bills 
from  the  Government,  the  banks  pay  for  the  securi- 
ties so  taken  by  a  draft  on  their  balance  at  the 
Bank  of  England,  and  so,  for  the  time  being, 
hold  so  much  less  cash  at  the  Bank  of  England  and 


66  MONEY  WATERED  [chap. 

so  much  more  investments;  but  as  the  Government 
uses  its  increased  balances  to  pay  debts,  by  drawing 
cheques  on  them,  and  the  contractors  who  get  the 
cheques  pay  them  into  their  banks,  the  banks  get 
back  their  balances  at  the  Bank  of  England  and 
also  have  their  deposits  increased,  by  the  cheques 
on  the  Bank  of  England,  which  their  customers 
pay  in;  and  so  when  the  transaction  is  all  com- 
plete the  banks  find  themselves  with  their  deposits 
increased  by  the  amount  that  they  have  subscribed 
to  the  new  loan,  or  whatever  the  security  may 
be.  In  other  words,  they  and  the  Government  be- 
tween them,  by  this  credit  operation,  have  increased 
the  amount  of  currency  in  the  hands  of  the  public, 
and  if  at  the  same  time  there  has  been  no  corre- 
sponding increase  in  the  volume  of  goods,  infla- 
tion is  thereby  produced.  The  figures  given  above 
are  complicated  by  the  addition,  during  the  period, 
of  two  small  banks  by  amalgamation;  but  if  bank- 
ing figures  of  the  whole  of  the  United  Kingdom 
could  be  compared,  the  total  increase  in  deposits, 
that  is  in  potential  currency,  would  be  over  400 
millions. 

A  similar  process  is  set  to  work  when  a  bank 
makes  an  advance  to  a  customer  to  enable  him  to 
take  up  War  Loan,  or  any  other  security,  or  for  any 
other  purpose.  As  I  have  shown  elsewhere,^  as 
long  as  the  loan  is  outstanding  there  is  almost 
certain  to  be  a  deposit  in  some  bank  or  other  against 
it.  The  English  banks  had  not,  up  to  the  date  of 
*  Meaning  of  Money,  loc.  cit. 


m 


III]       BORROWING  FOR  WAR  LOAN        67 

the  balance  sheet  shown  above,  done  much  of  this 
business  since  the  war.  In  fact,  owing  to  the  extent 
to  which  industry  is  now  on  a  cash  basis  and  owing 
to  the  decrease  in  Stock  Exchange  speculation,  the 
increase  in  loans  and  discounts  of  the  banks  was 
quite,  small.  But  during  the  first  quarter  of  1917 
they  must  have  made  very  large  advances  to  cus- 
tomers, since  every  one  was  urged  to  anticipate 
future  savings,  borrow  from  his  bank  and  sub- 
scribe to  War  Loan,  and  we  know  that  the  public 
responded  very  practically  to  this  appeal.  This 
v/as  quite  as  it  should  be,  since  it  was  by  only 
anticipating  savings  that  the  huge  amount  requited 
V  could  be  got ;  but,  as  was  pointed  out  at  the  time  by 
Professor  Pigou,  in  a  letter  to  the  London  Times  of 
January    19th,    191 7,    unless    the    money    so    sub- 

'  scribed  was  saved  and  paid  back  to  the  banks,  so 
£vi;Canceling  the  increased  credits,  as  fast  as  it  was 

I  spent  by  the  Government,  this  system  of  subscribing 

I  out  of  bank  advances  could  only  lead  to  inflation. 

5  The  banks  are,  among  other  things,  manufac- 
turers of  currency,  and  as  long  as  their  manufac- 
ture does  not  outstrip  the  pace  at  which  goods  are 
being  produced,  the  general  level  of  prices  will  re- 
main fairly  level.  Or  if  new  currency  that  they  cre- 
ate is  used  by  producers  to  set  to  work  and  make 
more  goods,  then  by  creating  it  they  are  helping  the 
production  of  goods  and  so  maintaining  the  equilib- 
rium between  goods  and  currency.  It  is  when  they 
manufacture  currency  that  is  handed  straight  over 
to  a  great  consumer  like  a  Government  in  war-time, 


68  MONEY  WATERED  [chap. 

that  inflation  can  almost  be  seen  getting  to  work.  A 
new  buyer  comes  into  the  markets,  with  a  great  mass 
of  currency  to  draw  on,  competing  with  all  other 
buyers  and  probably,  from  what  we  (in  England  at 
least)  know  of  Government  departments,  with 
itself,*  and  up  go  prices.  It  is  a  subtle,  insidious, 
but  very  effective  way  of  getting  money  out  of  us, 
not  by  taking  it  from  us,  but  by  watering  down  the 
value  of  all  the  money  that  we  possess.  As  the  prices 
of  goods  rise  our  buying  power  over  them  declines, 
and  so  we  have  to  put  up  with  less  of  them.  This  is 
right  and  reasonable  if  they  are  wanted  for  the  na- 
tion's needs,  but  the  inflation  process  does  the  job  in 
the  worst  possible  way  by  throwing  the  burden  of 
going  without  on  those  who  are  least  able  to  bear  it. 
Inflation,  however,  does  not  only  hit  the  poorest 
members  of  the  community.  It  is  bad  finance  for 
the  Government  that  indulges  in  it  to  any  extent 
that  suffices  to  cause  any  serious  rise  in  prices  and 
depreciation  in  the  currency.  In  the  first  place,  the 
Government  drives  prices  up  against  itself  and  so 
makes  the  war,  or  whatever  else  be  the  object  of  its 
spending,  more  costly.  In  the  second,  the  Govern- 
ment, being  not  only  an  inflater  but  a  borrower, 
since  it  is  by  the  borrowing  process  that  much  of 
the  inflation  is  done,  borrows  at  a  time  when  the 
currency  is  depreciated  by  its  own  action  and  en- 

*A  report  of  the  Committee  of  Public  Accounts  quoted  in 
the  London  Economist  of  August  26th,  1916,  p.  357,  shows  that 
the  British  Admiralty  and  the  War  Office  were  buying  against 
one  another. 


Ill]        IS  INFLATION  INEVITABLE?         69 

gages   to  pay  interest  and  pay  the  debt  back   in 
years  hereafter,  when  we  may  fairly  hope  that  prices 
will  have  gone  back  from  their  present  level.     Con- 
sequently the  British  Government  borrows  millions 
of  depreciated  pounds  with  a  fair  prospect  of  hav- 
( ing  to  pay  back  its  debtors  later  on  with  pounds  that 
/  will  be  much  more  valuable.    Unlike  the  quality  of 
j  mercy  which  blesseth  him  that  gives  and  him  that 
1  takes,  the  system  of  financing  by  inflation  curses 
\  both  the  inflater  and  the  inflatee. 

"But,"  it  is  argued,  "you  cannot  possibly  get 
away  from  inflation  in  time  of  war.  It  is  inevitable. 
The  rise  in  prices  makes  a  larger  amount  of  cur- 
rency necessary."  But  could  there  be  a  general  rise 
in  prices  without  an  increase  in  the  volume  of  cur- 
rency? There  could,  of  course,  if  there  had  been  a 
decrease  in  the  production  of  goods.  But  if  the 
production  of  goods  had  remained  fairly  constant, 
as  it  probably  did  if  we  include  war  material  as 
goods,  and  if  there  had  been  no  increase  in  the 
volume  of  currency,  then,  I  think,  though  certain 
prices  must  have  risen,  others  must  have  fallen. 

The  price  of  carriage  by  sea  could  not  help  rising, 
owing  to  the  demands  on  the  merchant  fleets  of  the 
world  by  the  warring  Governments,  the  shutting  up 
of  Germany's  ships  in  neutral  harbors,  and  the  de- 
struction of  Allied  and  neutral  tonnage  by  German 
submarines.  This  would  have  meant  that  everything 
that  came  by  sea  would  be  dearer,  so  that  in  Eng- 
land food  prices  must  have  risen.  At  the  same 
time,  the  more  generous  diet  required  by  the  fighter 


70  MONEY  WATERED  [chap. 

and  the  war  worker  would  have  had  a  like  effect. 
War  materials  would  also  have  inevitably  been 
dearer.  But  if  there  had  been  no  increase  in  the 
currency,  the  greater  volume  of  it  required  for  pur- 
chases of  food  and  war  material  would  surely  have 
lessened  the  amount  available  for  buying  other 
things  and  their  prices  would  have  fallen,  and  the 
decreased  demand  for  them  might  have  set  free  la- 
bor employed  in  producing  them  and  so  helped  to 
increase  the  production  of  food  and  war  material 
and  checked  the  rise  in  their  prices.  Without  infla- 
tion private  extravagance  in  England  would  have 
been  much  less  general.  If,  for  example,  the  higher 
prices  paid  by  the  British  Government  for  the  petrol 
which  it  was  using  in  such  huge  amounts  had  dimin- 
ished by  their  full  extent  the  supply  of  money  that 
other  people  could  pay  for  it  and  for  other  things, 
we  might  have  heard  less  about  English  race  meet- 
ings thronged  with  private  cars  in  the  third  year  of 
the  war.  But  as  long  as  the  British  Government  and 
the  banks  kept  ladling  out  fresh  supplies  of  cur- 
rency, competition  between  the  State  and  the  citizen 
for  the  goods  and  services  available  became  ever 
keener,  to  the  detriment  of  both  parties.  As  more 
money  went  into  buying  potatoes,  owing  to  the  rise 
in  their  price,  less,  if  it  had  not  been  for  inflation, 
might  have  gone  into  buying  flowers,  and  so  ground 
and  labor  used  for  growing  flowers,  would  much 
more  rapidly  have  been  used  for  growing  potatoes, 
and  the  rise  in  the  price  of  potatoes  would  have  been 
checked.     As  more  money  was  needed  for  ocean- 


Ill]  GOODS  AND  SERVICES  71 

carried  food,  less  would  have  been  in  buyers'  pockets, 
if  there  had  been  no  inflation,  for  ocean-carried  furs 
and  feathers  and  wine  and  silk  dresses,  and  so  more 
ship  space  would  have  been  set  free  for  food,  and 
the  rise  in  its  price  would  have  been  checked.  In 
other  words,  if  all  the  money  required  by  the  British 
Government  for  the  war  had  been  taken  out  of  the 
pockets  of  the  public  in  taxes  and  loans  paid  for  out 
of  savings,  instead  of  much  of  it  being  manufactured 
by  the  Government  and  the  banks  between  them, 
then  the  public's  buying  power  would  have  been 
reduced  by  the  full  amount  spent  on  the  war;  and 
the  reduction  of  consumption,  by  which  alone  war's 
needs  can  be  met,  would  have  been  brought  about 
with  much  less  friction  and  economic  disturbance. 

For,  as  has  been  said  over  and  over  again  in  the 
course  of  the  British  War  Savings  campaign,  the 
Government  makes  war  with  goods  and  services. 
Those  that  it  needs  for  war  can  only  be  handed  over 
to  it  if  somebody  goes  without.  It  cannot  by  any 
possibility,  or  by  any  financial  sleight  of  hand,  get 
more  than  the  country  can  produce,  either  by  its 
own  labor  and  energy  or  by  selling  goods  abroad 
in  exchange  for  war  goods  made  abroad,  plus  the 
amount  that  it  can  get  abroad  by  borrowing  and 
selling  securities.  As  a  warring  country's  power  to 
borrow  and  sell  securities  abroad  is  obviously  lim- 
ited, it  is  clear  that  after  a  certain  point  the  war  de- 
mand for  goods  and  services  can  only  be  met  by  the 
reduction,  enforced  or  voluntary,  of  the  buying 
power  of  the  civilian  population.     Inflation  helps 


72  MONEY  WATERED  [chap.iii 

to  effect  this  in  an  insidious,  roundabout,  and  in- 
equitable manner,  laying  much  of  the  war  burden  on 
the  wrong  shoulders.  It  is  not  the  sole  cause  of 
all  the  rise  in  prices,  but  by  encouraging  extrava- 
gance it  helps  to  raise  the  prices  of  goods  that  need 
not  necessarily  rise  at  all,  and  it  increases  the  rise 
in  prices  in  which  a  rise  is  inevitable. 

As  has  been  said,  inflation  does  not  "cut  much 
ice"  in  normal  times.  But  it  is  like  one  of  those 
diseases  that  demoralize  the  patient  into  enjoying 
them,  and  war's  experience  shows  that  England 
will  have  to  be  careful  to  get  cured  of  it  as  quickly 
as  she  can  without  starting  some  other  ailment,  and 
then  keep  it  out  of  her  system. 


CHAPTER  IV 

MONEY   TAKEN    BY  TAXES 

Given  a  free  people  with  real  control  over  the  con- 
duct of  its  affairs,  a  genuine  confidence  in  the  jus- 
tice of  the  system  by  which  money  is  taken  from  it 
and  in  the  wisdom  and  care  with  which  the  money 
is  spent,  and  the  citizen  would  no  more  object  to 
paying  taxes  than  he  objects  to  paying  a  bill  for  a 
book,  or  a  suit  of  clothes,  or  a  set  of  golf  clubs  that 
he  has  ordered  for  himself.  The  prevalent  spirit  on 
the  subject  shows  how  very  far  we  are  from  having 
attained  these  ideals. 

"All  taxes  are  confiscation,"  said  Mr,  Joseph 
Hume  as  already  quoted,  so  expressing  the  common 
view  that  the  State  takes  our  money  in  an  arbitrary 
and  unjust  manner  and  spends  it  on  purposes  which 
may  be  necessary  but  are  only  submitted  to  reluc- 
tantly on  that  ground,  the  said  expenditure  being 
necessarily  and  inevitably  a  cause  of  the  impoverish- 
ment of  the  people.  In  England  in  the  last  century, 
in  the  heydey  of  the  simple  and  satisfactory  theory 
that  every  man  knew  his  own  interest  best  and  could 
be  trusted  to  secure  it  if  left  alone,  and  that  by  this 
pleasant  process  the  interest  of  the  whole  com- 
munity would  certainly  be  attained,  it  was  a 
favorite  phrase  with  politicians  and  political  writers 

.73. 


74  MONEY  TAKEN  BY  TAXES    [chap. 

that  such  money  as  was  saved  from  taxation  would 
"fructify  in  the  pockets  of  the  people." 

How  much  truth  is  there  in  this  view?  It  is 
surely  a  very  large  assumption  to  suppose  that  all 
the  money  which  Government  takes  would,  if  left 
in  the  people's  pockets,  have  been  spent  on  some 
g"ood  and  useful  purpose  and  have  increased  the  pro- 
ductive power  of  the  community.  This  theory  takes 
it  for  granted  that  the  Government's  revenue  is 
derived  entirely  from  money  which  would  other- 
wise have  been  saved  and  well  invested  in  repro- 
ductive enterprise.  Whereas  we  know  that,  owing 
to  various  defects  in  the  machinery  of  the  laws  gov- 
erning joint  stock  companies  and  the  ingrained  crav- 
ing in  the  hearts  of  most  of  us  for  short-cuts  to 
fortune,  a  good  deal  of  the  money  that  is  invested 
gets  into  the  pockets  of  unsavory  company  promo- 
ters and  the  evil  brood  employed  by  them,  or  is  sunk 
in  enterprises  that  never  had  a  chance  of  yielding  a 
profit  to  their  shareholders;  and  further,  it  by  no 
means  follows  that  what  the  Government  takes 
comes  out  of  what  the  citizens  would  have  saved. 
Very  probably  it  comes  out  of  what  they  would 
have  spent  on  themselves ;  and  only  the  most  in- 
corrigible optimist,  or  the  most  ignorant  theorist, 
could  maintain  that  whatever  people  spend  on 
themselves  is  spent  well.  The  vulgarity  and 
absurdity  and  ugliness  of  many  of  the  objects  on 
which  the  rich  and  middle  classes  spend  their  money 
are  apparent  to  all :  lavish  entertainments  at  which 
everybody  is  bored,  theatrical  shows  which  are  a 


IV]  "FRUCTIFYING"?  75 

scarifying  criticism  of  the  intelligence  of  those 
who  pay  money  to  be  amused  by  them,  clothes  and 
gewgaws  in  which  no  really  civilized  people  would 
consent  to  be  found  dead, — these  are  a  few  of  the 
more  innocent  examples  of  the  manner  in  which 
hundreds  of  millions  of  money  that  the  State  does 
not  take  "fructifies"  in  the  pockets  of  its  more  for- 
tunate citizens.  Bad  spending  among  the  poor  is 
perhaps  even  commoner,  owing  to  their  ignorance 
of  the  uses  of  money,  and  is  much  more  tragical 
in  its  effects  owing  to  the  fact  that,  even  if  they 
spent  well,  they  would  seldom  have  enough  to  give 
them  a  reasonable  chance  of  full  development  of 
their  faculties  and  capacities. 

Since,  then,  there  is  much  bad  spending  in  all 
classes,  we  have  no  right  to  assume,  as  is  often 
done,  that  all  the  money  taken  by  the  State  and 
spent,  well  or  ill,  by  it,  would  have  been  well  spent 
if  left  to  "fructify  in  the  pockets  of  the  people." 
It  might  have  gone  in  race  meetings.  Tango  teas, 
picture  palaces,  fashionable  fripperies,  strong  drink, 
or  trashy  "literature,"  all  of  which  things  have 
their  uses  in  amusing  people  who  do  not  know  how 
to  amuse  themselves  better,  but  do  not  lead  to 
much  "fructification." 

It  may  also  be  mentioned  here  that  money  taken 
by  Government  does  not  vanish.  It  is  spent  by  the 
Government  on  something,  and  thereby  provides  a 
large  number  of  people  with  a  living.  When  it  is 
spent  on  the  debt  charge,  it  is  handed  straight 
over  to  the  debt-holders,  in  interest  or  redemption 


76  MONEY  TAKEN  BY  TAXES     [chap. 

of  debt.  Spent  on  education,  it  pays  those  who 
build  schools  and  on  the  army  of  patient  workers 
who  teach  the  rising  generation — if  spent  well,  no 
money  could  be  better  invested,  or  fructify  more 
fruitfully.  Even  when  spent  on  public  defense  it 
provides  wages  for  those  who  build  our  navy  and 
make  our  guns,  and  feeds  and  clothes  those  who 
fight  for  us.  It  is  true  that  if  we  had  universal 
peace  all  those  good  workers  might  be  building 
merchant  ships  instead  of  battleships,  or  making 
and  growing  useful  things  instead  of  learning  and 
practicing  the  art  of  destruction.  But  as  things  are 
at  present,  national  security  is  a  thing  that  most 
of  us  are  very  willing  to  pay  for,  and  with  private 
spending  what  it  is,  we  cannot  be  sure  that  by  any 
means  all  the  work  of  these  workers,  if  set  free  from 
I  military  and  naval  objects,  would  be  put  to  good 
'  and  fruitful  use.  It  is  of  course  absurd  to  go  to  the 
other  extreme  and  contend  that  taxation  creates 
employment.  It  only  transfers  the  power  of  giving 
employment  from  individuals,  who  might  or  might 
not  have  used  it  well,  to  the  State,  which  may  or 
may  not  use  it  well. 

No  chapter  on  taxation  can  be  complete  that  does 
not  quote  Adam  Smith's  famous  four  maxims  on 
the  subject : 

"(i)  The  subjects  of  every  State  ought  to  contri- 
bute towards  the  support  of  the  Government,  as  near- 
ly as  possible,  in  proportion  to  their  respective  abili- 
ties;  that   is,    in   proportion   to  the   revenue   which 


IV]  SMITH'S  MAXIMS  'jy 

they  respectively  enjoy  under  the  protection  of  the 
State. 

(2)  The  tax  which  each  individual  is  bound  to  pay 
ought  to  be  certain  and  not  arbitrary.  The  time  of 
payment,  the  manner  of  payment,  the  quantity  to  be 
paid,  ought  all  to  be  clear  and  plain  to  the  contributor 
and  to  every  other  person. 

(3)  Every  tax  ought  to  be  levied  at  the  time,  or 
in  the  manner,  in  which  it  is  most  likely  to  be  con- 
venient for  the  contributor  to  pay  it.  .  .  .  Taxes  upon 
such  consumable  goods  as  are  articles  of  luxury  are 
all  finally  paid  by  the  consumer,  and  generally  in  a 
manner  that  is  very  convenient  for  him.  He  pays 
them  little  by  little,  as  he  has  occasion  to  buy  the 
goods.  As  he  is  at  liberty,  too,  either  to  buy  or  not 
to  buy  as  he  pleases,  it  must  be  his  own  fault  if  he 
ever  suffers  any  considerable  inconveniency  from 
such  taxes. 

(4)  Every  tax  ought  to  be  so  contrived  as  both  to 
take  out  and  keep  out  of  the  pockets  of  the  people 
as  little  as  possible,  over  and  above  what  it  brings  into 
the  public  treasury  of  the  State."  ^ 

These  maxims  have  been  generally  accepted  by 
later  economists  as  a  summary  of  the  principles  on 
which  taxation  should  be  based,  except  the  very 
lucid  and  sensible  American  writer  General  F.  A. 
Walker,  who  decided  that  "the  first  and  most 
famous  of  them  cannot  be  subjected  to  the  slightest 
test  without  going  all  to  pieces."  As  to  the  other 
three,  their  equity  and  sound  sense  can  hardly  be 
disputed  (though  Walker  thought  them  "at  the 
'  Wealth  of  Nations,  Book  V,  Chap.  II,  Part  2. 


78  MONEY  TAKEN  BY  TAXES     [chap. 

best,  trivial"),  and  it  is  also  pleasant  to  observe 
that  the  British  system  of  taxation  is  not  far  from 
securing  them.  If  Englishmen  fail  in  the  matter  of 
No.  2,  it  is  their  fault  rather  than  the  State's ;  if  they 
chose  they  could  all  know  how  much  they  were  pay- 
ing for  government  when  they  buy  a  glass  of  beer  or 
a  pound  of  tea  or  a  packet  of  cigarettes,  and  if  many 
of  them  buy  these  things  every  day  without  even 
knowing  that  they  are  paying  taxes,  that  is  only  be- 
cause they  have  not  troubled  to  think  about  it.  As 
to  No.  3,  the  convenience  of  the  contributor  might 
be  still  further  consulted  in  England  if  income  tax 
could  be  paid  by  installments,  instead  of  in  one  lump 
as  it  was  before  the  war,  or  in  two  as  now  arranged. 
A  system  of  monthly  installments  would  be  much 
more  convenient  to  a  large  number  of  taxpayers, 
and,  though  it  might  involve  a  good  deal  of  book- 
keeping, it  would,  on  the  other  hand,  help  to  keep  the 
State's  income  even,  whereas  the  present  system 
leaves  long  periods  during  which  it  has  to  borrow  in 
anticipation  of  taxes  to  be  received  later. 

But  it  is  in  Maxim  No.  i  that  the  whole  question 
of  the  equitable  apportionment  of  taxation  is  really 
locked  up;  and,  if  we  examine  the  great  American 
economist's  severe  criticism  of  his  great  Scottish 
predecessor,  it  will  help  to  a  clearer  understanding 
of  the  whole  matter. 

"This  maxim  [says  Walker],  though  it  sounds 
fairly,  will  not  bear  examination.  What  mean  those 
last  words  'under  the  protection  of  the  State'?    They 


IV]  WALKER  ON  SMITH  79 

are  either  irrelevant,  or  else  they  ■mean  that  the  pro- 
tection enjoyed  affords  the  measure  of  the  duty  to 
contribute.  But  the  doctrine  that  the  members  of 
the  community  ought  to  contribute  in  proportion  to 
the  benefits  that  they  derive  from  the  protection  of 
the  State,  or  according  as  the  services  performed 
in  their  behalf  cost  more  to  the  State,  involves  the 
grossest  practical  absurdities.  Those  who  derive 
the  greatest  benefit  from  the  protection  of  the  State 
are  the  poor  and  weak — women  and  children  and  the 
aged ;  the  infirm,  the  ignorant,  the  indigent.  Even  as 
among  the  well-to-do  and  wealthy  classes  of  the  com- 
munity, does  the  protection  enjoyed  furnish  a 
measure  of  the  duty  to  contribute?  If  so,  the 
richer  the  subject  or  citizen  is,  the  less,  proportion- 
ately, should  he  pay.  A  man  who  buys  protection 
in  large  quantities  should  get  it  at  wholesale  prices, 
like  the  man  who  buys  flour  and  meat  by  the  car- 
load. Moreover,  it  costs  the  State  less  to  collect 
a  given  amount  from  one  taxpayer  than  from 
many."  ^ 

Walker's  admirable  lucidity  endears  him  to 
economic  students,  so  often  baffled  by  the  obscurity 
in  which  the  masters  of  the  science  enfold  their 
utterances,  but,  I  think,  these  criticisms  of  Adam 
Smith  only  serve  to  bring  out  the  truth  of  the 
principles  that  lay  behind  his  famous  first  maxim. 
For  Walker  implies  that  the  poor  and  weak,  women 
and  children  and  the  aged,  enjoy  most  revenue 
under  the  protection  of  the  State,  which  they  obvi- 
ously do  not.     It  is  very  true  that  the  poor  need 

'Political  Economy,  Part  VI,  §§  588  et  seq. 


8o  MONEY  TAKEN  BY  TAXES     [chap. 

protection,  but  they  do  not  need  it  in  respect  of 
any  property  that  they  own  or  of  revenue  that  they 
enjoy.  The  protection  of  property,  which,  as  we 
saw  in  Chapter  I,  is  the  original  and  still  a  most 
important  function  of  the  State,  has  to  be  given 
in  increasing  measure  as  the  extent  of  the  property 
owned,  and  the  revenue  derived  from  it,  increases. 
A  junior  clerk  whose  property  consists  of  the  bal- 
ance in  his  pocket  of  his  last  week's  wages  needs  lit- 
tle protection  from  the  State  or  anybody  else.  "Can- 
tahit  vacuus  coram  latrone  viator."  His  employer, 
with  some  furniture  in  a  rented  suburban  house,  a 
few  hundreds  invested,  and  a  policy  on  his  life, 
has  little  that  a  burglar  could  get  at,  though  his 
investments  and  his  business  make  his  revenue 
depend  on  the  general  stability  of  society,  such  as 
is  provided  by  Government.  A  great  English  landed 
proprietor  with  an  agricultural  rent-roll  and  a 
square  mile  or  two  of  house  property  in  cities  en- 
joys his  revenues  only  because  the  State  is  there  to 
protect  his  property  and  enable  him  to  enjoy  it  in 
peace  and  safety.  As  Adam  Smith  says  in  another 
passage : 

"It  is  only  under  the  shelter  of  the  civil  magis- 
trate that  the  owner  of  that  valuable  proi>erty  which 
is  acquired  by  the  labor  of  many  years,  or  perhaps  of 
many  successive  generations,  can  sleep  a  single  night 
in  security."  ^ 

Walker's  contention  that  those  with  least  prop- 

•Book  V,  Chap.  I,  Part  II,  "Of  the  Expense  of  Justice." 


IV]  WALKER  ON  SMITH  8i 

erty  require  most  protection  for  it  almost  looks  as 
if  it  had  been  dictated  by  a  desire  to  pick  holes  in 
the  work  of  his  illustrious  predecessor.  And  his 
argument  that  the  physically  weak,  women  and  chil- 
dren and  the  aged,  need  more  protection  for  their 
property  is  very  little  sounder.  For  if  we  went  back 
to  a  state  of  anarchy  and  everybody  took  what  he 
could  get,  the  strong  man  would  certainly  have  an 
advantage,  but  he  would  not  long  enjoy  much  rev- 
enue under  such  conditions,  because  production 
would  promptly  be  brought  to  a  standstill.  As  to 
the  "reduction  on  taking  a  quantity"  argument — the 
view  that  the  rich  should  buy  protection  more 
cheaply  because  they  need  more  of  it,  on  the  same 
principle  that  enables  a  man  to  buy  bread  and  meat 
more  cheaply  by  the  car-load — here  Walker  is  surely 
quoting  the  principles  of  the  market-place  in  a 
sphere  to  which  they  cannot  be  applied.  The  mer- 
chant with  a  big  stock  of  an  article,  which  he  may 
or  may  not  be  able  to  sell,  is  naturally  willing  to 
make  a  concession  in  price  to  a  buyer  who  will  take 
a  line  off  his  hands,  though  even  in  the  market-place 
this  principle,  or  rule  of  thumb,  does  not  work 
always,  or  beyond  a  certain  point.  But  a  Govern- 
ment providing  its  people  with  protection  for  their 
property  works  under  quite  other  conditions.  It 
knows  exactly  how  much  it  means  to  provide,  and 
it  ought  to  be  able  to  find  out  which  of  its  citizens 
will  be  most  benefited  by  this  protection  and  appor- 
tion the  cost  upon  them  accordingly  by  taxation. 
So  when  Walker  goes  on: 


82  MONEY  TAKEN  BY  TAXES     [chap. 

"Returning  to  the  maxim  of  Dr.  Smith,  I  ask,  does 
it  put  forward  abihty  to  contribute,  or  protection 
enjoyed,  as  affording  the  true  basis  of  taxation? 
Which?  If  both,  on  what  principles  and  by 
what  means  are  the  two  to  be  combined  in  prac- 
tice?"— 

when  he  puts  these  posers  we  have  an  easy  answer. 
Ability  to  contribute,  since  it  depends  on  revenue 
enjoyed  (when  we  have  got  at  the  right  meaning 
of  that  ambiguous  phrase),  involves  also  protection 
enjoyed,  so  that  both  principles  lead  us  to  the  same 
end.  And  the  two  can  be  combined  in  practice  and 
are,  in  a  halting  manner  that  needs  improvement 
and  expansion,  in  the  system  of  taxation  that  has 
been  painfully  evolved  in  English-speaking  coun- 
tries. Logically  applied,  Adam  Smith's  first  maxim 
would  confine  taxation  to  direct  taxation,  that  is 
taxation  paid  directly  by  the  taxpayer  to  the  State, 
assessed  on  a  graduated  scale  according  to  the  tax- 
payer's net  income  and  differentiated  according  to 
the  source  from  which.it  is  derived.  In  other  words, 
by  laying  down  this  maxim  he  anticipated  the  beau- 
ties of  the  income  tax  and  death  duties,  and  of  the 
principles  of  graduation  and  differentiation  that 
have  been  so  slowly  and  tentatively  introduced  into 
our  fiscal  systems.  All  these  things  are  implied  in 
the  prophetic  musings  of  the  great  Scottish  thinker. 
Graduation  is  clearly  implied,  as  was  shown  by 
Walker's  criticizing  Adam  Smith  for  having  appar- 
ently   forgotten   it,    because   he   did   not   actually 


IV]  WALKER  ON  SMITH  83 

mention  it.  We  cannot  put  the  proof  better  than 
in  Walker's  words : 

"Is  the  ability  [he  asks]  of  two  persons  to  con- 
tribute necessarily  in  proportion  to  their  respective 
revenues?  Take  the  case  of  the  head  of  a  family 
having  an  income  of  $500  a  year,  of  which  $400  is 
absolutely  essential  to  the  maintenance  of  himself 
and  wife  and  children  in  health  and  strength  to  la- 
bor. Is  the  ability  of  such  a  person  who  has  only 
$100  which  could  possibly  be  taken  for  public 
uses,  one-half  as  great  as  that  of  another  head 
of  a  family  similarly  situated  in  all  respects  ex- 
cept that  his  income  amounts  to  $1,000,  and  who  has 
therefore  $600  which  could  conceivably  be  brought 
under  contribution?    Manifestly  not." 

Most  true,  but  there  is  nothing  to  show  that  Adam 
Smith  thought  that  it  was.  Any  one  who  has  only 
$500  a  year,  of  which  $400  is  needed  for  the  bare 
necessaries  of  "health  and  strength  to  labor," 
can  hardly  be  said  to  enjoy  a  revenue  at  all,  for 
the  whole  of  his  margin  is  needed  for  the  decencies 
and  comforts  that  must  be  had  before  he  and  his 
children  can  be  provided  for  in  such  a  manner  as 
is  necessary  to  make  them  efficient  citizens  of  a 
civilized  state,  with  their  intelligence  cultivated  to 
a  point  that  will  enable  them  to  exercise  judgment 
concerning  public  questions.  Those  only  can  be 
said  to  enjoy  a  revenue  who  have  a  margin  over 
what  is  needed  to  maintain  them  and  their  depen- 
dents in  health  and  efficiency.  To  tax  anybody 
below  that  line  is  bad  business   from  the  State's 


84  MONEY  TAKEN  BY  TAXES     [chap. 

point  of  view,  because  by  injuring  their  health  and 
efficiency  the  State  promotes  the  growth  of  a  class 
that  is  compelled  to  live,  more  or  less,  either  on 
private  charity  or  public  support,  and  by  its  lack  of 
efficiency  impairs  that  of  the  nation  at  a  time  of 
crisis. 

This  principle  is  recognized  by  the  terms  on  which 
an  income  tax  is  assessed.     It  would  not  be  im- 
posed on  a  man  with  $400  a  year  at  all.    Graduation, 
the  system  by  which  no  income  tax  is  imposed  below 
a  certain  limit,  and  varies  afterwards  according  to 
■   the  size  of  the  income,  is  the  great  advantage  that 
\  income  tax  carries  with  it.     The  release  of  small 
*^-  incomes  has  always,   necessarily,  been  part  of  it. 
When  it  was  first  introduced  in  Britain  in  1798  it 
vS,       was  only  imposed  on  incomes  of  $300  and  upwards, 
V    was  graduated  l^etween  $300  and  $1,000  and  was 
10%  above  that  line  *;  in  1806  the  limit  of  exemp- 
tion was  reduced  to  $250.    Its  medieval  predecessor, 
the  poll  tax,  was  first  raised  in  1377,  and  was  gradu- 
ated.    Beggars  paid  nothing,  ordinary  folks  4c?.  a 
I  head,  and  the  rate  varied  from  this  level  up  to  10 
\  marks  (£6  13.?.  4c?.)  on  dukes. ^     The  income  tax 
\  was,  most  unwisely,  taken  off  after  the  Napoleonic 
j  wars,  and  when  it  was  reintroduced  in  1842  by  Peel, 
/  it  was  imposed  on  incomes  of  $750  and  upwards.^ 
f  This  level  was  later  raised  to  $800,  and  was  reduced 
in  Mr.  McKenna's  first  War  Budget  in  191 5  and 

*  Chisholm's  Analysis,  p.  424. 
^  Ibid.,  p.  416. 

•  Selignian,  The  Income  Tax,  p.  132. 


IV]  DIFFERENTIATION  85 

brought  down  to  $650,  which  seems  to  be  low 
enough  as  it  is  at  present  assessed,  but  by  no  means 
as  low  as  it  should  go  if  and  when  the  tax  is  rid  of 
a  great  anomaly  that  at  present  mars  it,  namely,  its 
great  unfairness  to  those  who  have  families  to  edu- 
cate. But  before  we  look  further  into  this  and  other 
drawbacks  that  at  present  clog  an  otherwise  excel- 
lent tax,  let  us  consider  its  other  beauty,  that  of 
being  differentiated  according  to  the  source  of 
income,  whether  "earned  or  unearned." 

This,  again,  is  a  principle  that  has  only  fought 
its  way  with  the  utmost  difficulty  into  England's  sys- 
tem of  taxation,  though  the  logical  soundness  of  it 
/        is  obvious.     It  is  clear  that  two  men,  each  with 
$5,000  a  year,  do  not  "enjoy"  a  revenue  of  this 
amount  in  the  same  sense  if  one  of  them  earns  it  as 
^      a  salary  by  hard  work,  which  will  cease  at  any  time 
^    if,  owing  to  bad  health  or  advancing  years,  he  has  to 
.    give  his  work  up,  while  the  other  receives  it  in 
^   dividends  on  Government  securities  which  he  has 
^  inherited  or  bought  out  of  his  own  savings,  and  is 
therefore  certain  of  enjoying  it  as  long  as  he  lives 
and  of  being  able  to  hand  it  on  when  he  dies  to  his 
children  or  any  one  else  whom  he  may  choose.     It 
has  not  yet  been  possible  to  differentiate  still  further 
and  impose  a  different  rate  of  tax  on  the  income 
that  a  man  receives  from  investments  which  he  has 
.'    saved  himself  from  that  which  is  paid  on  an  in- 
.   herited  income.     When  a  taxpayer  has  created,  by 
1  saving,  his  own  "unearned"  income,  it  is  at  first  sight 
'  unfair  that  it  should  be  so  called  and  so  taxed. 

^ 


86  MONEY  TAKEN  BY  TAXES      [chap. 

But,  even  so,  his  enjoyment  of  it  is  clearly  so  much 
the  more  secure,  and  moreover  the  principle  of  dif- 
ferentiation is  also  at  work  through  the  British  death 
duties,  which  take  a  large  and  well-graduated  slice 
out  of  estates  when  the  demise  of  their  owner  gives 
the  State  its  periodical  opportunity.  So  that  the 
income  of  those  who  live  on  inherited  wealth,  besides 
paying  income  tax,  is  either  diminished  every  time 
an  owner  of  it  dies  and  the  State  takes  toll  of  the 
capital,  or  is  lessened  each  year  by  the  provision 
that  the  owner  makes,  through  insurance  or  other- 
wise, in  order  to  provide  against  the  death  duties, 
and  maintain  the  capital  of  the  estate  intact. 

It  is  commonly  objected  to  the  death  duties  that 
they  are  a  tax  on  accumulated  capital  and  that,  as 
the  State  uses  their  proceeds  for  purposes  of  ordi- 
nary expenditure,  it  is  paying  for  current  needs  out 
of  capital  and  so  doing  a  thing  that  is  vicious  in  the 
case  of  an  individual  or  company.  But  is  this 
necessarily  true  ?  The  tax,  it  is  true,  is  assessed  on 
capital,  but  I  think  it  is  paid,  and  that  all  taxes  have 
to  be  paid,  out  of  current  income,  either  of  the 
previous  owner  of  the  estate,  if  he  insured  in  order 
,'  to  provide  for  it,  or  of  its  inheritors,  if  they  do  not 
realize  any  portion  of  the  estate  to  meet  it,  or  of 
those  who  buy,  with  saved  money,  any  part  of  the 
estate  that  is  sold  to  meet  the  tax.  In  the  last- 
mentioned  case,  the  saved  money  that  is  handed 
over  to  Government  to  spend  would  otherwise  have 
^^.  gone  into  some  other  investment  which  would 
perhaps   have   increased  the   community's   produc- 


IV]  TAXING  CAPITAL  87 

live  power,  but  this  possibility  is  attached  to  all 
money  that  the  Government  takes  out  of  our 
pockets  and  is  one  of  the  reasons  why  we  have  to  be 
careful  to  see  that  the  Government  spends  it  well. 
A  graver  objection  to  the  death  duties  is  that  they 
may  tend  to  check  the  incentive  to  accumulation  by 
the  individual,  a  point  that  will  be  dealt  with  later. 

All  taxation  comes  out  of  somebody's  income. 
If  we  try  to  tax  capital,  we  can  only  do  so  if  the 
owner  can  pay  the  tax  out  of  income  or  can  sell  a  bit 
of  his  capital  to  some  one  else  who  pays  for  it  out 
of  his  income.  A  tax  on  capital  is  thus  only  a  way 
of  assessing  income  tax  according  to  the  amount  of 
capital  possessed,  and  is  a  questionable  way  of 
doing  so  because  of  the  difficulty  of  knowing  what 
anybody's  possessions  are  really  worth  until  they  are 
offered  for  sale  in  a  free  market,  and  also  because  of 
the  great  expense  and  delay  involved  by  making  any 
such  valuation.  Moreover,  the  mistakes  made  by 
Government  valuers,  when  estates  have  to  be 
valued  for  purposes  of  taxation,  are  astonishing. 
In  a  certain  British  colony  a  man  once  died  who  had 
picked  up,  in  the  course  of  several  visits  to  England, 
a  collection  of  beautiful  and  very  valuable  Turners 
and  other  water-colors.  The  local  official  valuer 
remarked  to  his  heir,  ''I  see  from  the  dates  on  these 
pictures  that  they're  all  second-hand,  so  I've  put 
them  in  at  half  a  crown  "^  each." 

But  since  all  taxation  falls  on  income,  and  since 
the  amount  of  the  income,  with  due  regard  to  its 
^  About  sixty  cents. 


88  MONEY  TAKEN  BY  TAXES      [chap. 

source,  is  the  obvious  test  of  ability  to  pay,  and  since 
this  ability  clearly  grows  with  each  increase  in  the 
income  above  the  sum  required  for  the  bare  neces- 
saries of  life,  it  is  evident  that  the  income  tax,  if 
we  could  get  it  into  an  ideal  shape,  is  the  most 
equitable  form  in  which  taxation  can  be  imposed. 
Regard  to  the  amount  of  the  income  involves 
graduation,  and  regard  to  the  source  of  the  income 
/involves  differentiation,  because  it  is  easier  to  pay, 
and  more  protection  by  the  State  is  involved,  in 
the  case  of  income  from  saved  money  than  in  the 
case  of  earned  money;  and  still  more  protection 
from  the  State  is  involved  in  the  case  of  income 
from  money  that  is  inherited  or  received  by  gift, 
since  the  secure  transfer  of  wealth  by  legacy  or 
otherwise  is  one  of  the  most  obvious  of  the  material 
benefits  granted  by  stable  government. 

The  ideal  form  of  an  income  tax  would  thus  be 
thrice  differentiated,  according  to  whether  it  was 
imposed  on — 

( 1 )  An  income  now  being  in  the  technical  sense 

earned,  that  is  a  wage  or  salary  or  pro- 
fessional or  business  profits ; 

(2)  An  income  that  is  produced  by  savings 

made  by  its  owner; 

(3)  An  income  that  is  produced  by  inherited 

wealth  or  wealth  received  by  gift. 

If  this  triple  differentiation  could  be  made,  then  Eng- 
land would  be  able  to  do  away  with  the  death 
duties,  with  the  great  unfairness  that  they  involve, 


IV]  THE  IDEAL  TAX  89 

for  example,  when  one  estate  changes  hands  fre- 
quently owing  to  the  accident  of  death,  and  another 
escapes  by  being  held  for  eighty  or  ninety  years  by  a 
specially  tough  owner  who  happened  to  inherit  it 
when  an  infant.  If  the  death  duties  were  thus  com- 
muted into  the  shape  of  a  higher  annual  income  tax 
on  those  who  got  income  from  inherited  wealth, 
there  would  be  a  much  greater  chance,  amounting 
almost  to  certainty,  that  they  would  be  met  by  sav- 
ing on  the  part  of  the  holder  of  the  income. 

Thus  differentiated,  the  ideal  income  tax  would 
be  graduated  logically  and  steadily  up  to  the  highest 
range  of  incomes,  not  as  it  is  now  in  England  with 
a  series  of  capricious  jerks,  and  with  the  super-tax 
as  an  excrescence  on  the  top.  It  would  also  be 
purged  of  the  inequity  which  at  present  in  Eng- 
land lumps  together  the  income  of  husband  and 
wife  as  one  for  assessment  purposes,  and  of  the  still 
worse  vice  that  it  now  possesses  of  taking  little  or  no 
account  of  the  children  whom  the  taxpayer  may  have 
to  educate.  The  unfairness  of  an  income  tax  which 
is  the  same  in  the  case  of  two  brothers  who  each 
earn  $5,000  a  year,  but  one  of  whom  has  eight  chil- 
dren and  the  other  has  none,  is  glaringly  apparent,  if 
we  apply  Adam  Smith's  test  of  ability  to  pay.  Al- 
lowances for  children  were  introduced  during  the 
Napoleonic  war,  but  were  given  up  in  1806,  as  they 
had  "led  to  an  astounding  official  increase  of  large 
families."  *  Mr.  Lloyd  George  made  a  small  begin- 
ning in  his  Budget  of  1909  towards  remedying  this 
'  Seligman,  The  Income  Tax,  p.  103. 


^.i 


90  MONEY  TAKEN  BY  TAXES      [chap. 

great  blot  on  this  tax  by  giving  an  abatement  of  $50 
(from  the  income  assessed)  for  each  child  under  six- 
teen in  the  case  of  incomes  under  $2,500.  Since 
then  the  amount  of  the  abatement  has  been  raised  to 
$125  for  each  child,  and  this  relief  is  given  to  in- 
comes up  to  $3,500.  Even  so  it  is  pitifully  inade- 
quate. The  proposal  made  by  Mr.  Sidney  Webb  and 
his  fellow- Fabians  in  their  book  on  How  to  Pay  for 
the  War  is  much  more  efficacious,  if  it  could  be  put 
into  practice.  They  suggest  that  the  basis  of  assess- 
ment in  the  case  of  families  dependent  on  one  income 
should  be  the  income  divided  by  the  number  of  those 
.  dependent  on  it ;  that  is  to  say,  that  if  a  man  had 
$5,000  a  year  and  a  wife  and  eight  children,  he 
would  be  assessed  on  ten  incomes  of  $500  each,  and, 
as  incomes  of  $500  each  are  at  present  exempt,  he 
would  be  free  of  all  income  tax,  while  his  bachelor 
brother  would  pay  the  full  amount  on  his  $5,000.^ 
"But   wait   a   minute,"    says   the   bachelor.      "I 

•  The  full  text  of  the  Fabian  suggestion  is  as  follows : 

"What  is  suggested  is  that,  so  far  as  incomes  not  exceeding 
£2,500  a  year  are  concerned,  whether  earned  or  unearned,  it 
should  be  open  to  any  person  assessed  to  ask  that  all  the 
taxable  receipts  of  all  the  members  of  his  family,  living  in  the 
same  household  with  him  and  sharing  in  its  expenses,  or  main- 
tained elsewhere  wholly  or  partially  at  his  expense,  should  be 
aggregated  for  assessment  as  a  Family  Income ;  and  that  Fam- 
ily Incomes  so  arrived  at  should,  for  income  tax  purposes,  be 
divided  by  the  number  of  members  of  the  family  (husband, 
wife,  children,  stepchildren,  father  and  mother,  or  grandpar- 
ents only)  actually  maintained  therefrom.  There  could  then 
be  allowed  from  the  combined  Family  Income,  in  respect  of 


IV]  THE  IDEAL  TAX  91 

don't  quite  see  why  I  should  be  penalized  for 
choosing,  or  perhaps  being  obliged  by  a  hopeless 
passion,  to  live  in  single  blessedness.  If  you  let 
my  brother  off,  it  is  clear  that  I  shall  have  to  be 
taxed  higher.  But  why?  He  chooses  to  spend  his 
income  on  the  joys  of  bringing  up  a  family  and  the 
delights  of  an  uproarious  nursery.  Why  should  he 
therefore  be  let  off  while  I,  because  I  prefer  keeping 
a  yacht,  and  collecting  blue  china,  and  living  a  life 
of  peace  and  comfort,  or  perhaps,  if  you  knew 
all,  giving  up  my  spare  cash  to  good  works,  am 
to  pay  more  to  encourage  his  philoprogenitive 
proceedings?" 

The  answer  is  obvious  to  all  but  confirmed 
bachelors,  and  it  lies  in  the  fact  that  the  State  wants 
citizens  and  wants  them  brought  up  under  the  best 
possible  conditions.  To  penalize  income-tax  payers 
who  are  bringing  up  families,  promotes  that  ten- 
dency to  small  families,  or  none,  among  the  profes- 
sional classes,  which  leaves  the  business  of  bringing 
up  the  heirs  of  the  race  to  those  who  are  least  likely 
to  give  them  the  good  air,  good  food,  good  clothes, 
and  good  teaching  in  their  early  years  that  are  all- 
each  person  maintained  therefrom,  whatever  Abatement  each 
portion  of  such  income  would  justify  if  it  were  that  of  one 
person  only."— How  to  Pay  for  the  War,  pp.  237-8. 
In  order  to  prevent  the  suggested  abatements  and  allowances 
from  exempting  too  many  people  altogether  from  income  tax, 
these  writers  suggest  that  "nothing  in  them  should  be  allowed 
to  reduce  the  tax  actually  payable  below  the  minimum  of,  say, 
a  penny  in  the  pound  on  the  income  prior  to  the  deduction  of 
any  abatement  or  allowance." 


92  MONEY  TAKEN  BY  TAXES      [chap. 

important  to  their  efficiency  wlien  they  are  grown 
up.  Economically  and  in  every  other  respect,  a  na- 
tion can  only  thrive  if  it  is  composed  of  citizens 
sound  in  mind  and  body,  and  any  taxation  that 
makes  the  middle  class  sterile  is  a  bad  economic 
blunder. 

And  since  we  are  only  chasing  the  rainbow  of 
the  ideal,  we  may  also  add  that,  in  order  to  make 
the  income  tax  perfect,  it  would,  though  assessed 
on  the  whole  income,  only  be  imposed  on  that  part 
of  a  man's  income  which  he  spends,  and  he  would 
be  allowed  abatement  in  consideration  of  any  part 
of  it  that  he  invested  and  not  only,  as  now  in  Eng- 
land, on  that  part  invested  (within  certain  limits) 
in  life  insurance.  This  further  exemption  would 
be  made,  under  an  ideal  system,  because  a  State 
cannot  make  economic  progress  unless  its  citizens 
continually  produce  more  than  they  consume  on 
immediate  enjoyment,  so  that  there  may  be  a 
margin  of  savings  continually  available  for  capital 
purposes,  that  is,  for  increasing  future  production 
by  putting  labor  and  energy  into  new  equipment 
instead  of  into  luxuries  and  amusements.  This 
can  only  be  done  if  we  save,  and  it  is  therefore 
obvious  that  no  tax  can  be  called  ideal  which  does 
not  encourage  investment.  In  time  of  war,  how- 
ever, this  abatement  might  have  to  be  modified. 

An  income  tax  adorned  by  the  improvements 
above  suggested  would  be  so  evidently  equitable 
that  it  might  be  imposed  on  wage-earners'  incomes 
considerably  below  the  limit  which  it  touches  at 


IV]  THE  IDEAL  TAX  93 

present,  and  might  be  used  for  raising  the  greater 
part  of  the  national  revenue,  however  great  the 
extent  of  the  revenue  required.  There  would  be 
no  need  then  to  talk  about  widening  the  basis  of 
taxation,  for  taxation  would  be  based  on  the  widest 
possible  foundation,  the  aggregate  income  of  all 
citizens  above  the  poverty  line.  Under  ideal  con- 
ditions it  would  be  collected,  no  longer  "at  the 
source,"  but  from  the  individual  citizen,  on  his 
declaration  of  all  the  particulars  required.  It 
would  not  be  payable  by  companies  and  firms,  but 
only  by  their  creditors,  shareholders,  and  partners 
as  they  received  interest  due  and  profits  distributed. 
Thereby  all  the  evil  effects  on  company  finance  that 
are  now  produced  by  the  close  watch  that  the  Brit- 
ish Inland  Revenue  authorities  keep  on  their  inter- 
pretation of  profit  would  be  abolished.  Any  com- 
pany or  firm  that  preferred  the  strait  path  of  good 
finance  and  took  a  generous  view  of  the  claims  of 
depreciation  and  upkeep  would  no  longer  be  deterred 
by  the  consideration  that  it  would  have  to  pay 
income  tax  on  som.e  of  the  money  that  it  was  putting 
into  the  maintenance  and  improvement  of  its  busi- 
ness. Moreover,  British  companies  with  a  large 
number  of  foreign  shareholders,  and  whose  profits 
are  earned  abroad,  would  no  longer  be  impelled,  as 
they  are  by  the  present  high  rate  of  income  tax,  to 
shift  their  seat  of  domicile  to  a  foreign  clime,  be- 
cause only  that  portion  of  their  profits  would  be 
taxed  which  is  paid  into  the  pockets  of  British  credi- 
tors and  shareholders.    So  devised,  taxation  would 


94  MONEY  TAKEN  BY  TAXES      [chap. 

not  fall  directly  upon  industry  at  all,  but  only  on 
those  who  spent  the  proceeds  of  industry.  We  need 
not  pretend  that  it  would  not  affect  and  hamper  in- 
dustry, since  all  taxation  must  do  so  more  or  less; 
but,  I  think,  we  can  claim  that  it  would  do  so  less 
than  any  other. 

Such  a  tax  would  meet  and  fulfill  all  the  require- 
ments laid  down  by  Adam  Smith  or  added  to  them 
by  the  light  of  modern  experience.  We  should  all 
know  exactly  what  we  were  paying  for  the  mainte- 
nance of  the  State;  graduation  and  differentiation 
would  do  all  that  can  be  done  by  human  fallibility 
to  make  the  tax  work  according  to  the  ability  of 
the  taxpayer  with  due  regard  to  the  degree  of  pro- 
tection that  the  State  has  to  give  to  secure  him  the 
enjoyment  of  his  revenue;  if  the  tax  were  payable 
in  monthly  installments  it  would  cause  no  incon- 
venience to  the  man  with  a  small  income ;  every 
penny  of  it  would  go  straight  into  the  coffers  of  the 
State,  less  the  cost  of  collection;  and  the  monthly 
collection  of  it  would  ensure  a  comparatively  regular 
revenue  against  the  nation's  outlay. 

How  far  is  all  this  mere  rainbow  chasing  and 
straining  our  eyes  after  an  impossible  ideal?  Not 
so  far  as  it  looks,  perhaps,  though  the  acceptance 
of  such  a  tax  in  its  entirety  requires  a  degree  of 
economic  education  and  of  common  honesty  in  the 
community  that  we  may  not  yet  have  attained. 
In  England  it  has  long  been  an  argument  against 
all  schemes  of  graduation  and  differentiation  of  the 
income  tax  that  we  thereby  lose  the  great  hold  over 


IV]  THE  IDEAL  TAX  95 

the  would-be  evader  which  is  given  to  the  tax-gath- 
erer by  collection  at  the  source.  And  yet  graduation 
and  differentiation  have  been  introduced  without 
any  sign  of  loss  to  the  revenue,  and  during  the  war 
the  British  Treasury  has  gone  a  step  further  and  is- 
sued a  loan  the  interest  on  which,  so  far  as  it  is  held 
by  registered  or  inscribed  holders,  is  to  be  paid  with- 
out deduction  of  the  tax,  the  holder  being  left  to 
include  it  in  his  own  declaration  of  the  extent  of 
his  liabiHty. 

The  fact  that  if  the  income  tax  were  worked  on 
these  lines  everybody  who  was  believed  to  be  within 
its  scope  would  be  obliged  to  make  a  declaration  of 
his  income  would  be  a  drawback  in  the  eyes  of 
those  who  still  object  to  the  "inquisitorial"  require- 
ment implied  by  it — that  the  State  should  know  the 
details  of  everybody's  income.  This  old-fashioned 
objection  is,  I  think,  out  of  date.  As  it  is,  the  major- 
ity of  British  income-tax  payers  have  to  declare  de- 
tails of  their  incomes,  either  in  order  to  secure 
abatement,  or  differentiation,  or  for  super-tax  pur- 
poses. Seeing  that  the  alleged  "inquisition"  is  al- 
ready applied  to  so  many,  there  would  be  little  or  no 
hardship  in  clapping  it  on  in  all  cases,  as  was  actu- 
ally done  in  1798.^^  Like  all  the  other  suggestions 
made  above,  it  is  only  a  further  development  of  a 
principle  already  recognized  and  acted  on  in  Eng- 
land. 

""All  persons  being  required  to  make  returns  of  the  whole 
of  their  income,  from  whatever  source  derived." — Chisholm's 
Analysis,  p.  ,425. 


96  MONEY  TAKEN  BY  TAXES      [chap. 

This  is  true  even  of  the  proposal,  though  it  seems 
at  first  sight  revokitionary,  that  the  tax  should  only 
be  imposed  on  that  part  of  the  income  which  is 
spent  instead  of  on  what  is  earned.  This  principle 
is  already  recognized  in  England  in  the  case  of  life 
insurance,  and  it  is  hard  to  see  why  it  should  not  be 
applied  to  all  other  forms  of  thrift  into  which  the 
taxpayer  likes  to  put  his  savings.  That  income  tax 
should  be  so  imposed  was  urged,  over  half  a  century 
ago,  by  John  Stuart  Mill,  and  the  suggestion  also  has 
the  authority  of  Professor  Pigou  behind  it,  though 
he  admits  that  there  are  technical  difficulties  to  be 
overcome. ^^  These  difficulties  are  obvious  enough, 
until  the  day  comes  when  every  citizen  can  be 
trusted  to  make  an  honest  declaration,  or  when  at 
least — as  may  be  the  case  now — the  general  level 
of  honesty  is  high  enough  to  ensure  that  the  amount 
of  evasion  by  tax-cheaters  would  be  small  enough 
not  to  count.  Such  an  arrangement  would,  of 
course,  carry  with  it  its  contrary;  if  the  tax  were 
not  imposed  on  the  net  amount  invested,  it  would 
have  to  be  imposed  on  the  net  amount  of  any  invest- 
ments realized  in  those  years  in  which  the  taxpayer 
sold  out  more  than  he  invested;  because  otherwise 
any  one  could  escape  the  tax  by  investing  all  his  in- 
come in  one  year  and  selling  the  securities  in  the 
next.  If  the  thing  could  be  worked,  its  effect  in 
cheapening  capital,  increasing  the  capital  fund  of  the 
country,  and  so  adding  to  its  power  to  produce  the 
good  things  of  the  earth,  would  be  excellent,  and  it 

"  Wealth  and  Welfare,  p.  371.  2. 


IV]  THE  IDEAL  TAX  97 

taxation  now  imposed  in  England  on  what  is  called 
"imeanied"  income.  It  might  be  possible  to  do  it  by 
means  of  evidence  in  the  shape  of  stockbrokers'  con- 
tracts, and  certificates  from  lawyers  in  the  case  of  in- 
vestments in  mortgages.  The  thing  is  not  neces- 
sarily a  pedantic  aspiration  on  the  part  of  academic 
dreamers,  for  I  have  heard  it  urged,  not  only  as 
a  good  thing  if  it  could  be  done,  but  as  a  good  thing 
that  could  be  done,  by  a  very  practical  man  of  busi- 
ness; and  if  the  ingenious  taxgathering  experts 
were  to  decide  that  it  was  worth  doing,  they  could 
probably  devise  the  ways  and  means. 

The  suggestion  that  the  income  tax  should  be 
paid  by  the  individual  citizen  and  not  by  the  com- 
panies which  earn  his  income  for  him  as  stockholder 
may  be  criticized,  apart  from  its  parting  from  the 
principle  of  collecting  at  the  source,  as  giving  the 
power  to  companies  to  escape  taxation  by  refraining 
from  paying  dividends  and  putting  profits  into 
improvement  of  their  plant  or  into  investments. 
This  criticism  falls  to  the  ground  at  once  if  the 
principle  is  admitted  that  income  tax  should  not 
be  paid  on  saved  money,  because  money  that  com- 
panies put  into  depreciation  is  saved  money  in 
every  sense  of  the  word.  The  economic  progress 
of  the  community  is  helped  by  every  dollar  that 
companies  keep  back  from  their  stockholders  and 
put  into  their  plant  or  invest  well  otherwise ;  and  any 
encouragement  that  a  fiscal  system  can  give  to  this 
process  has  something  to  be  said  for  it,  though  there 
would  be  an  equitable  set-ofif  to  put  against  the  high 


98  MONEY  TAKEN  BY  TAXES      [chap. 

may  be  countervailing  drawbacks.  If  ever  a  time 
came  when  the  productive  capacity  of  the  whole 
world  were  fully  equipped  and  there  were  a  real 
glut  of  capital,  this  need  to  encourage  saving  would 
no  longer  exist.  But  we  are  not  likely  to  see  that 
happen  just  yet.  There  would,  perhaps,  be  a  dan- 
ger that  some  companies  might  try  to  distribute 
profits  by  devious  means — issues  of  bonus  stock  and 
so  on — in  order  to  enable  their  stockholders  to  es- 
cape taxation.  But  the  keen  blades  of  the  Revenue 
Department  could  very  well  be  trusted  to  deal  faith- 
fully with  any  such  buccaneering. 

Still  greater  is  the  difficulty  involved  in  making 
the  range  of  the  income  tax  run  lower  and  embrace 
all  the  wage-earners  who  are  a  fit  subject  of  taxa- 
tion. In  their  case  (in  England,  at  least)  the  pre- 
cariousness  of  their  earnings  is  much  greater  than 
in  that  of  the  salary-earner  or  even  of  the  more 
precarious  professional  workers,  such  as  the  free- 
lance journalist.  Moreover,  they  cannot,  thanks  to 
the  education  that  has  been  given,  or  denied,  them 
for  many  generations,  be  expected  to  keep  count  of 
their  earnings  with  any  regularity,  and  they  would 
be  likely  to  resent  being  pestered  about  them.  It 
may  take  a  long  time  before  they  are  ready  to  rec- 
ognize that  an  income  tax  applied  more  vigorously 
to  wages  would  be  fairer  to  them,  if  they  would 
take  the  necessary  trouble  to  tackle  it,  than  the  heavy 
charge  of  indirect  taxation  that  they  now  bear. 
Economic  education  of  all  classes  is  the  only  way  in 
which  the  path  of  the  tax-gatherer  can  be  made 


IV]  INDIRECT  TAXATION  99 

smooth  and  easy.  The  more  this  education  grows, 
the  faster  will  be  the  movement  towards  graduated 
and  differentiated  direct  taxation  as  the  fairest  way 
by  which  the  State  can  take  our  money. 

It  is  sometimes  said  that  the  income  tax  pun- 
ishes and  fines  the  hard  and  successful  worker. 
This  is  so,  but  what  system  of  taxation  does 
not?  Whatever  device  you  use,  you  can  only 
tax  those  who  are  getting  and  spending  money. 
But  a  system  which  taxes  more  lightly  those  who 
are  earning  than  those  who  are  getting  interest 
on  saved  or  inherited  money,  which  makes  due 
allowance  for  family  liabilities  and  taxes  what  is 
V  spent  and  not  what  is  saved,  seems  to  give  the 
^  hard  and  successful  worker  a  better  chance  than 
most  others. 

When  once  the  beauty  and  fairness  of  graduation 
and  differentiation  are  seen  and  appreciated,  it 
becomes  clear  that  all  indirect  taxation  is  to  a 
certain  extent  unfair,  because  graduation  and  differ- 
entiation cannot  be  applied  to  it.  It  might  be  pos- 
sible, though  very  difficult,  to  graduate  indirect  tax- 
ation by  increasing  its  rate  according  to  the  quanti- 
ties of  goods  purchased;  but  this  system,  if  applied 
to  necessaries  of  life,  would  evidently  involve  hard- 
ship by  taking  no  account  of  the  taxpayer's  ability 
to  pay.  That  the  amount  of  taxation  paid  by  the 
buyer  of  a  pound  of  tea  should  be  the  same  (as  it 
is  in  England),  whether  the  tea  is  to  be  consumed 
by  one  living  on  an  inherited  million,  or  by  a 
widowed  charwoman  with  five  children  and  earn- 


100         MONEY  TAKEN  BY  TAXES      [chap. 

iiig,  with  luck  and  when  in  good  health,  perhaps 
ten  dollars  a  week,  is  a  gross  fiscal  blunder  and 
a  serious  practical  injustice.  But  there  is  no  way 
round  it,  and  this  unfairness  is  necessarily  attached 
to  all  forms  of  indirect  taxation.  It  is  true  that, 
as  Adam  Smith  pointed  out,  taxes  upon  "such  con- 
sumable goods  as  are  articles  of  luxury  can  be 
avoided  by  the  taxpayer,  as  he  is  at  liberty  either 
to  buy  or  not  to  buy  as  he  pleases."  But  so  many 
things,  such  as  clothes,  are  necessaries  up  to  a 
point,  and  become  luxuries  when  that  point,  so 
difficult  to  decide  on,  has  been  passed,  that  taxing 
luxuries  is  not  nearly  as  easy  as  it  is  desirable. 
And  even  in  the  case  of  admitted  luxuries,  such  as 
alcoholic  drink,  the  absence  of  graduation  makes 
the  tax  unfair.  Why  should  I,  if  I  drink  a  glass 
of  beer  in  the  course  of  a  country  walk,  pay  no 
more  taxation  on  it  than  a  mechanic  who  partakes 
of  a  similar  indulgence  after  working  eight  hours 
in  front  of  a  furnace?  Ability  to  pay  is  quite 
different  in  these  two  cases,  but  the  amount  paid 
is  the  same.  And  yet  this  inequity  attached  to 
indirect  taxation,  that  is  so  evident  as  soon  as  the 
principles  of  graduation  and  differentiation  are 
admitted,  has  been  so  slowly  recognized,  and  is  still 
so  much  ignored,  that  it  was  once  observed  by  the 
late  Sir  Robert  Giffen  that  "on  the  whole  an  equal 
amoimt  of  indirect  taxation  causes  perhaps  only 
the  half  or  the  third  of  the  privation  and  suffering 
entailed  by  an  equal  amount  of  direct  taxation." 
Mr.  Gladstone's  ponderous  joke,  in  which  he  com- 


IV]  STUPIDITY'S  PRICE  loi 

pared  the  two  forms  of  taxation  to  two  attractive 
damsels,  to  both  of  whom,  ''whether  it  be  due  to 
a  lax  sense  of  moral  obligation  or  not,"  he  paid  his 
addresses  impartially,  is  well  known  to  all  students 
of  the  subject,^^  and  only  shows  how  little  the 
equities  of  taxation  were  studied  in  the  days  of  that 
enlightened  fiscal  reformer. 

Nevertheless,  if  it  be  a  fact  that  direct  taxation 
hurts  while  indirect  does  not,  it  is  natural  and 
inevitable  that  the  practical  politician  who  has  to 
raise  revenue  for  the  State  should  prefer  the  latter. 
If  we  are  really  so  stupid  as  to  prefer  to  be  bam- 
boozled out  of  our  money  by  paying,  on  a  necessar- 
ily inequitable  basis,  for  government,  while  we  think 
we  are  paying  for  groceries  or  tobacco,  instead  of 
being  assessed  directly  according  to  our  ability  and 
the  source  of  our  income  and  knowing  exactly  what 
we  are  paying,  then  we  deserve  what  we  get  and 
get  what  we  deserve,  which  is  unfair  taxation.  In 
a  democratic  country  in  which  all  have  political 
responsibility,  it  is  clear  that  all,  except  those  who 
have  only  the  barest  necessaries  of  life,  should  pay 
taxes  and  so  have  some  share  in  fiscal  responsibil- 
ities. To  do  this  in  a  manner  which  is  specially  de- 
signed to  veil  the  fact  that  taxes  are  being  paid,  is 
hardly  facing  the  problem  squarely ;  but  until  educa- 
tion has  gone  far  enough  to  make  everybody  ready 
to  pay  his  fair  share  by  means  of  direct  taxation,  it 
is  the  only  way  that  can  be  hit  on.  The  inequities 
connected  with  indirect  taxes  are  manifold;  not  only 

"  Seligman,  The  Income  Tax,  p.  165. 


I02         MONEY  TAKEN  BY  TAXES      [chap. 

can  they  not  be  graduated  or  differentiated,  but  it  is 
impossible  to  impose  them  generally,  in  a  country 
like  England,  because  taxes  on  the  necessaries  of 
life  are  clearly  bad,  from  the  national  point  of  view, 
in  a  community  in  which  many  people  have  not 
enough  to  eat.  So  that  in  days  before  the  war  any 
Englishman  who  escaped  income  tax  and  did  not 
smoke  or  drink  alcohol  or  tea  contributed  practically 
nothing  to  the  Government  under  whose  protection 
he  lived.  Since  the  war,  taxes  on  cocoa,  mineral  wa- 
ters, and  entertainments  have  widened  the  fiscal  net. 
The  proportion  of  British  revenue  contributed  by  in- 
direct taxation  has  steadily  declined.  In  184 1-2  it 
was  73%;  in  1912-13  it  was  42.4%,^^  and  during 
the  war  it  is  generally  assumed  to  have  declined  still 
further,  though  it  might  be  argued  that  the  excess 
profits  tax  is  an  indirect  tax,  since  most  of  it  has 
been  ultimately  paid  by  consumers  through  the  high 
prices  that  caused  the  excess  profits. 

Indirect  taxation,  being  paid  by  those  who  buy 
certain  articles  for  consumption,  has  one  great  ad- 
vantage, which  justifies  its  position  in  England's 
fiscal  system  until  such  time  as  she  is  able  to  impose 
income  tax  only  on  that  part  of  the  income  which 
is  spent.  It  hits  us  when  we  spend  and  not  when 
we  earn  or  save.  In  time  of  war,  when  there  is 
not  enough  labor  and  energy  to  do  all  that  is  needed 
for  the  fighting  forces  and  for  the  export  trade  and 
for  providing  necessaries,  any  tax  that  checks  in- 
dividual spending,  or  takes  part  of  the  sum  spent 

"  British  Budgets,  by  Sir  B.  Mallet,  pp.  105  and  493- 


IV]  IMPORT  DUTIES  103 

for  the  Government,  is  clearly  useful  and  beneficial. 
And  this  is  almost  equally  true  in  time  of  peace, 
for  then  also  wasteful  spending  is  economically  un- 
sound, checks  the  material  progress  of  the  nation, 
makes  the  hard  lot  of  the  poor  still  harder,  and 
lessens  the  demand  for  lalx)r.^*  So  that  if  only 
we  could  graduate  and  differentiate  indirect  taxa- 
tion, it  would  have  advantages  over  direct  as  the 
latter  is  at  present  imposed.  As  we  cannot,  it  has 
to  be  left  in  its  present  unsatisfactory  state,  pressing 
heavily,  in  England,  on  the  poorest  consumers  of 
such  articles  as  tea,  tobacco,  and  alcohol,  while  pa- 
triotic ladies  who  give  $15,000  for  a  fur  coat  in  time 
of  war  pay  no  taxation  in  the  process  except  the 
penny  stamp  on  a  cheque.  A  graduated  invoice 
stamp  on  all  retail  purchases  of  $2^  and  over  is  a 
way  round  this  problem,  but  there  are  many  practi- 
cal difficulties  in  the  way  of  it  and  if,  as  is  likely, 
both  shopkeepers  and  their  customers  united  in  re- 
I  senting  and  detesting  the  tax,  it  is  highly  probable 
that  there  would  be  much  evasion. 

Of  all  forms  of  indirect  taxation,  the  worst,  ac- 
cording to  the  pure  principles  of  taxation,  is  that 
imposed  on  imported  goods  of  a  kind  that  is  pro- 
duced in  the  country,  unless  a  home  tax  (or  excise 
duty)  of  the  same  amount  is  imposed  on  goods  pro- 
duced inland.  Because  the  effect  of  the  import 
\j  duty  is  to  raise  the  price  of  the  article  and,  if  the 

^       home  producer  is  not  similarly  taxed,  this  means 

'^fX,        "I  have  developed  this  platitude  in  a  book  called  Poverty 
and  Waste,  published  in  1913. 


l 


.T 


t^ 


I04         MONEY  TAKEN  BY  TAXES  [chap,  iv 

that  part  of  the  higher  price  will  go  into  his  pocket 
instead  of  into  the  coffers  of  the  State.  Nearly- 
all  nations,  including  the  British  colonies,  make 
free  use  of  this  method  of  taxation,  because  they 
think  it  pays  them  in  the  long  run,  or  think  it  nec- 
essary to  the  dignity  or  security  of  the  State,  that 
certain  industries  should  be  thus  protected  at  the 
expense  of  the  consumer ;  or  because  they  hope  thus 
to  maintain  the  standard  of  comfort  of  their  wage- 
earners.  Some  people  think  that  when  the  war  is 
over  England  also  will  adopt  the  system  of  a  pro- 
tective tariff.  We  shall  see.  It  is  beyond  the  scope 
of  this  work  to  enter  on  this  highly  controversial 
ground.  Ever}^  one  will  admit  that,  if  Protection  is 
the  only  or  the  best  means  of  keeping  alive  in  the 
country  an  industry  that  is  essential  to  national 
safety,  then  the  most  bigoted  Free  Trader  must 
agree  to  it.  It  must  also  be  admitted  that  many 
great,  rich  nations — including  England's  richest  en- 
emy and  her  richest  ally — have  flourished  under 
Protection.  On  the  other  hand,  it  warps  and  ham- 
pers trade,  as  a  whole,  and  introduces  an  artificial 
complication  into  a  matter  which  is  naturally  quite 
complicated  enough ;  but  perhaps  the  strongest  argu- 
ment against  it  is  its  tendency  to  make  questions 
of  taxation,  especially  in  a  democratically  governed 
country,  an  unclean  welter  in  which  politics  and 
business  cover  one  another  with  dirt. 


CHAPTER  V 

THE  LIMITS  OF   GOVERNMENTAL  SPENDING 

So  far  we  have  considered  the  means  by  which  the 
State  takes  our  money  from  us  for  public  purposes^ 

( 1 )  By  borrowing  it,  and  then  taxing  us  to  pay 
the  lenders; 

(2)  By  diminishing  the  buying  power  of  our 
money  by  increasing  its  volume,  with  or 
without  the  help  of  bankers; 

^~-  (3)   By  taxes. 

There  is  yet  another  way  by  which  some  very  clever 
people  who  have  studied  the  question  with  great 
care  and  diligence  think  that  the  State  might  earn 
a  great  revenue,  and  that  is  by  gathering  money 
from  us  that  we  now  pay  to  private  undertakers  of 
enterprise,  and  they  believe  that  the  State  would 
do  us  a  great  benefit  at  the  same  time  by  giving 
us  better  service  than  these  private  undertakers. 
And  many  very  earnest  and  high-minded  people, 
who  hate  the  waste  and  ugliness  involved  by  the 
competitive  system,  have  long  believed  that,  if  the 
work   of   growing,   making,   and   distributing   the 

105 


io6         THE  LIMITS  OF  SPENDING     [chap. 

goods  that  we  need  were  in  the  hands  of  the  State, 
all  the  miserable  squalor  that  blots  our  economic 
system  might  be  washed  away,  man's  labor  would 
be  made  much  more  effective,  and  we  should  all  of 
us,  instead  of  wasting  most  of  our  lives  in  a  chaotic 
struggle  to  earn  our  livings  which  ends  in  ill-spent 
affluence  at  the  top  with  degraded  destitution  at 
the  bottom,  be  free  to  live  as  civilized  human  be- 
ings; with  time  and  energy  to  bring  out  all  that 
is  best  in  ourselves  and  others,  and  to  enjoy  the 
endless  store  of  joy  and  beauty  that  Nature  ever 
spreads  before  us,  often  to  be  buried  under  the 
mass  of  moral  and  physical  ugliness  that  is  heaped 
over  it  by  our  misguided  efforts  to  better  our  lot. 

If  these  views  are  right,  they  have  now  a  better 
chance  than  ever  before  of  winning  their  way  to 
action.  War  has  shown  us,  first,  how  astonishingly 
great  is  our  power  to  make  and  do  things  if  we 
really  want  and  mean  to.  Man  has  put  all  the 
prophets  wrong  who  said  that  a  great  war  could 
not  last  more  than  a  few  months,  by  proving  that 
he  could  concentrate  his  energies  on  destruction 
with  results  that  have  appalled  and  astounded  us, 
while  at  the  same  time  producing  all  that  was  re- 
quired for  his  material  welfare;  so  much  so  that 
during  the  first  two  years  of  the  war  the  general 
level  of  well-being  in  England  was  actually  im- 
proved, owing  to  the  more  even  distribution  of 
the  output,  which  was  an  economic  incident  of  the 
war ;  so  great  was  her  margin  of  unused  productive 
power  and  so  great  was  the  proportion  of  her  prq- 


V]  WAR'S  LESSONS  107 

ductive  power  that  was  put  into  turning  out  things 
that  were  not  necessary  to  the  nation's  welfare. 
Secondly,  the  war  has  shown  how  short-sighted 
it  is  for  any  great  and  rich  nation  to  allow  a  large 
part  of  its  population  to  be  stunted  in  mind  and 
body.  The  voice  of  the  social  reformer  is  now 
raised  in  harmony  with  that  of  the  recruiting  ser- 
geant, who  wants  sturdy  men  for  the  Army,  of  the 
employer,  who  wants  strong  and  intelligent  workers 
and  of  the  statesman,  who  wants  a  nation  behind 
him  every  member  of  which  can  understand  the 
tremendous  issues  for  which  we  are  fighting  and 
see  and  act  on  the  need  for  the  measures  taken  to 
secure  victory.  Never  has  there  been  a  time  when 
it  has  been  seen  more  clearly  that  a  nation,  to  be 
strong,  must  be  strong  from  top  to  bottom.  In 
other  words,  the  war  has  shown  us  how  much  we 
can  do  and  how  much  needs  to  be  done.  But  the 
question  still  remains,  whether  what  needs  to  be 
done  can  be  best  done  by  the  development  of  the 
individual's  sense  of  national  duty  in  work  and 
spending,  or  by  handing  over  to  the  State  a  con- 
tinually growing  share  of  the  task  of  producing  and 
distributing. 

At  a  time  when  a  brighter  era  is  undoubtedly 
dawning  for  mankind,  though  it  is  only  too  possible 
that  much  turmoil  and  struggle  may  yet  lie  between 
us  and  its  achievement,  there  seems  to  be  some- 
thing squalid  in  dwelling  on  the  purely  material 
side  of  the  matter.  After  all,  the  human  soul  is 
the  only  thing  that  really  counts.     If  everybody 


io8         THE  LIMITS  OF  SPENDING     [chap. 

were  pleasant  to  live  with,  all  other  things  would 
be  added  unto  us;  if  we  were  all  honest  and  kindly 
and  courteous  and  fair-minded  and  intelligent  and 
unselfish,  there  would  be  no  need  to  fash  ourselves 
about  output  and  distribution,  because  we  should  all 
be  doing  our  best  to  make  things  better,  and  all  these 
sordid  problems  would  solve  themselves.  But  as 
things  are,  material  considerations  are  of  the  great- 
est possible  importance,  because  it  is  so  much  easier 
for  the  necessary  qualities  to  be  acquired  by  people 
who  are  not  expected  to  spend  most  of  their  lives 
in  trying  to  get  a  better  share  of  the  world's  goods 
than  their  neighbors.  If  we  can  produce  plenty 
for  all  and  can  prevent  people  from  believing  that 
getting  more  than  plenty  for  themselves  is  the 
chief  object  of  life,  then  there  would  be  some  chance 
for  the  rudimentary  and  atrophied  human  soul, 
which  is  now  often  treated  very  like  the  vermi- 
form appendix — ignored  if  possible,  and  if  not,  cut 
out. 

If,  therefore,  it  is  the  fact  that,  by  handing  over 
great  industries  to  be  worked  by  the  State  for  profit, 
we  can  make  the  State  a  great  revenue  earner,  and 
at  the  same  time  do  away  with  some  of  the  competi- 
tion that  is  a  source  of  much  waste  and  mendacity, 
without  thereby  producing  a  system  of  organized 
and  hidebound  efficiency  that  would  kill  all  freedom 
and  initiative,  it  is  clear  that  we  shall  be  relieving 
the  taxpayer's  burden  and  perhaps  clearing  a  way 
towards  a  social  system  that  will  stand  daylight 
better  than  our  present  one. 


V]  A  FABIAN  SCHEME  109 

A  great  scheme  of  nationalization  has  been  put 
before  the  British  public  by  Mr.  Sidney  Webb  and 
his  Fabian  lieutenants,  in  a  book,  already  referred 
to,  called  How  to  Pay  for  the  War,  published  in 
19 1 6.  They  propose  to  increase  very  greatly  the 
scope  of  the  activities  of  the  Post  Office,  making  it 
do  much  of  the  work  that  is  now  done  by  bankers, 
and  to  nationalize  the  railways,  the  coal  industry, 
and  life  insurance;  and  they  urge,  with  a  wealth 
of  detail  that  is  evidently  the  result  of  laborious 
investigation,  that,  if  these  things  are  done,  the  pub- 
lic will  get  a  better  and  cheaper  service,  the  work- 
ers employed  will  get  better  treatment,  and  the 
State  will  earn  a  revenue  that  will  supply  a  mouth- 
filling  number  of  millions  for  paying  off  the  war 
debt.  This  attractive  argument,  of  course,  is  only 
a  development  of  the  Socialist  contention  and  an 
application  of  it  to  the  needs  of  the  moment;  and 
for  this  reason  will  be  refused  a  hearing  by  many 
to  whom  the  mere  name  of  Socialism  is  a  terror. 
But  a  Httle  later,  as  if  to  show  how  widely  and  in 
what  unexpected  quarters  the  idea  of  collectivist  en- 
terprise is  being  stimulated  by  war  problems,  there 
arises  a  new  portent  in  the  British  economic  sky  in 
the  shape  of  a  body  called  the  Empire  Resources 
Development  Committee,  which  also  wants  to  help 
to  pay  off  the  war  debt  by  means  of  State  enterprise 
in  industry  and  production,  chiefly  applied  to  over- 
seas enterprise,  though  one  of  its  manifestos  also 
includes  the  coal  and  light  and  power  industries  at 
home  among  the  means  by  which  the  after- war  debt 


no        THE  LIMITS  OF  SPENDING     [chap. 

charge  can  be  met  without  anybody  having  to  pay 
it;  because  the  State  will  be  able  to  do  business 
so  cleverly  that  it  will  find  the  money  out  of  net 
profits.  The  really  interesting  thing  about  this  Com- 
mittee is  that  it  bristles  with  names  that  have  been 
hitherto  renowned  for  Imperialist  rather  than  for 
Socialist  zeal,  such  as  Mr,  Rudyard  Kipling,  Sir 
Starr  Jameson,  Lord  Grey  (not  the  late  Secretary 
for  Foreign  Affairs),  Lord  Selbome,  Lord  Desbor- 
ough,  and  Mr.  H.  Wilson  Fox,  M.P.,  a  distinguished 
officer  of  the  Chartered  Company  of  British  South 
Africa;  and  with  them  is  Mr.  Vassar-Smith,  the 
highly  respected  chairman  of  Lloyds  Bank.  That 
names  such  as  these  should  be  found  on  a  manifesto 
advocating  what  one  used  to  think  was  pure  So- 
cialism shows  at  least  how  people's  minds  have 
been  shaken  up  by  the  war.  The  gist  of  their  con- 
tention is  that  the  immense  latent  resources  of  the 
British  Empire  can  be  worked  for  State  purposes 
and  under  State  auspices  in  such  a  way  that  we  shall 
be  able  to  "lift  from  the  peoples  of  the  Empire  the 
burdens  caused  by  the  war."  And  they,  like  Mr. 
Webb  and  his  colleagues,  think  that  the  State  can 
not  only  perform  this  financial  feat,  but  at  the  same 
time  cheapen  the  cost  to  consumers  of  articles  that 
it  provides  and  distributes. 

It  is  a  most  alluring  prospect  and,  if  there  Is  any 
chance  of  its  being  realized,  the  most  bigoted  In- 
dividualist will  hardly  Ifet  his  dislike  of  State  en- 
terprise stand  in  its  way.  But  is  it  not  an  enor- 
mous assumption  to  suppose  that  the   State  can 


V]  A  LARGE  ASSUMPTION  iii 

manage  an  enterprise  with  so  much  more  success 
than  a  private  undertaker  that  it  can  afford  to  buy 
him  out,  then  provide  a  better  service  or  a  better 
article,  pay  everybody  better,  and  finally  make  a 
thumping  net  revenue?  In  the  case  of  new  Im- 
perial enterprises,  there  might  be  no  one  to  be 
bought  out,  though  vested  interests  sometimes  are 
discovered  in  the  most  unlikely  corners  when  a 
chance  of  compensation  arises.  The  Imj>erial  De- 
velopment Committee  expressly  states  that  the  pro- 
posed enterprises  should  not  be  managed  by  Civil 
Service  Departments;  but  it  does  not  explain  how 
the  managers  can  help  becoming  civil  servants  and 
so  being  involved  with  the  attributes  of  those  who 
work  the  State  machine,  so  admirably  within  cer- 
tain limits,  but  not  so  admirably  when  it  is  a  mat- 
ter of  conducting  business  enterprise  at  a  profit 
and  with  satisfaction  to  customers  and  employees. 
They  make  a  profit  out  of  the  Post  Office?  Yes; 
but  in  discussing  the  tangled  question  whether  what 
Englishmen  pay  for  postal  service  should  be  consid- 
ered as  taxation  or  payment  for  services  rendered, 
at  least  one  distinguished  economist  has  decided  that 
postal  revenue  is  taxation  only  in  so  far  as  they 
pay  more  for  this  service  than  we  should  if  it  were 
managed  privately.  Every  one  agrees  that  it  is  im- 
possible to  gauge  this  amount,  but  no  one  seems  to 
-^  doubt  that  it  exists,  and  that  postal  facilities  would 
be  cheaper  if  they  were  provided  by  private  enter- 
prise. Mr.  Harold  Cox,  that  stern,  unbending  foe  of 
State  enterprise,  dealt  faithfully  with  the  proposals 


112         THE  LIMITS  OF  SPENDING     [chap. 

of  the  Imperial  Development  Committee  in  an  edi- 
torial in  the  Edinburgh  Reviezu  for  April  19 17,  and 
incidentally  gave  two  examples  of  cases  in  which 
the  State  had  taken  over  profitable  enterprises  and 
had  totally  failed  to  work  them  at  a  profit : 

"In  1870  the  State  acquired  possession  of  the  elec- 
tric telegraph  system  of  the  country,  which  had  been 
built   up   by   various   private   companies.      The   pur- 
chase was  recommended  to  the  House  of  Commons 
as  a  splendid  bargain  for  the  State.     The  permanent 
officials  who  prepared  the  scheme  assured  the  House 
that  the  whole  of  the  capital  cost  would  be  repaid 
in  fifteen  years  out  of  profits  and  that  after  that  period 
there  would  be  an  ever-increasing  revenue  to  relieve 
the  burdens  of  the  taxpayer.     That  was  the  prom- 
ise.    What  actually  happened  was  that  the  whole  of 
the  profit  disappeared  after  the  second  year  of  work- 
ing by  the  State ;  that  year  by  year  the  financial  po- 
sition has  grown  worse,  till  in  the  last  years  of  peace 
the  telegraphs  were  costing  the  taxpayer  a  sum  which 
cannot    be    put    at    less    than    £1,400,000    per    an;: 
num. 
j-"'    "Meanwhile,  the  telephone  had  been  invented.    Dur- 
ing many  years   the   State,   in   order   to   protect   its 
I  I   telegraph  monopoly,  did  its  utmost  to  stifle  the  de- 
J  I    velopment  of  the  new  invention.      Finally,  the  State 
J I    bought   up  the  telephones,   completing  the   purchase 
A    in   the    year    191 1.    Again   there   were   the   prophe- 
S^\     cies — though  in  a  somewhat  minor  key — of  a  lucra- 
tive bargain.     These  prophecies  have  gone  the  way 
of  the  old  ones.     The  whole  of  the  handsome  tribute 
of  over  £350,000  a  year,  which  the  National  Tele- 
phone Company  was  gratuitously  paying  to  the  State, 


V]  A  DOUBTFUL  POLICY  113 

vanished  at  once,  and  within  three  years  the  income 
collected  by  the  State  barely  covered  outgo- 
ings." 

With  these  actual  examples  before  them  English- 
men may  well  hesitate  before  embarking  on  a  large 
policy  of  State  enterprise,  especially  if  it  is  to  be 
directed  to  the  provision  of  necessaries  of  life  such 
as  food  and  coal.  Posts  and  telegraphs  and  tele- 
phones hardly  touch  the  life  of  the  very  poorest,  and 
though  if  they  are  bad  and  dear  they  are  a  hindrance 
and  burden  to  business,  their  extra  cost  is  a  small 
item  in  the  expense  of  industry;  but  it  would  be  a 
different  matter  if  the  actual  cost  of  living  were 
raised  through  an  attempt  at  revenue-earning  by 
State  enterprise  in  a  country  in  which  the  test  of 
experience  has  shown  it  to  be  dear  and  inefficient. 

Nevertheless,  we  have  no  right  to  shut  any  door 
on  a  possibility  of  economic  reform.  We  know  that 
there  are  countries  in  which  the  State  can  manage 
some  enterprises  well  and  profitably,  and  even  in 
England  certain  municipalities  have  earned  good 
profits  for  their  ratepayers  and  also  served  their 
customers  well  with  comparatively  simple  busi- 
nesses, such  as  tramway  transport.  It  may  be  that 
Government  departments,  like  the  rest  of  us,  have 
learnt  much  from  the  war  and  may  now  be  able  to 
tackle  problems  of  enterprise  with  a  new  freedom 
and  success.  Strongly  divergent  views  are  ex- 
pressed on  this  point,  and  no  one  who  has  not  been 
in  touch  with  the  facts  has  any  right  to  be  sure 


114         THE  LIMITS  OF  SPENDING     [chap. 

about  it.  Some  say  that  the  British  Munitions  De- 
partment has  been  a  miracle  of  official  competence 
and  success;  others  that  it  was  a  costly  chaos,  only 
saved  by  the  efforts  of  the  business  men,  trained  in 
the  school  of  competitive  enterprise,  whom  it  called 
in  to  help  it.  But  since  there  is  a  doubt  and  a  new 
atmosphere,  and  since  imaginative  folk  with  big  new 
ideas  want  to  give  England  a  lead,  there  seems  to  be 
no  reason  why  they  should  not  be  allowed  to  try  an 
experiment  on  a  small  scale,  to  be  widened  if  the 
experiment  succeeds.  Freedom  and  individual  in- 
itiative have  so  long  been  the  life-blood  of  her  na- 
tional development  that  one  is  loth  to  see  them 
encroached  on  even  by  the  most  efficient  form  of 
machine-made  bureaucratic  enterprise ;  and  the  ideal 
of  progress  through  the  improvement  of  the  individ- 
ual, and  a  widening  and  deepening  of  his  sense  of 
national  duty,  seems  to  be  a  much  higher  and  more 
hopeful  one  than  through  the  expansion  of  State 
regulation  to  a  point  which  implies  the  crippling  of 
the  soul  of  the  citizen.  Some  of  us  hope  that  when 
the  war  is  over  we  shall  get  rid  of  Government  con- 
trol as  far  and  as  fast  as  possible,  except  where  pre- 
vious experience  had  shown  it  to  be  necessary  in  the 
interests  of  thejyeaker  parties  to  economic  bargains. 

"My  experience  [said  Sir  Alfred  Booth  to  the  Cu- 
nard  Company's  shareholders  in  April  1917]  of  Gov- 
ernment control  has  only  served  to  convince  me  more 
firmly  than  ever  that  individual  enterprise  is  the  only 
spirit  which  can  quicken  the  dead  bodies  of  capital 
and  labor  into  life.  .  .  .  But  I  am  not  at  all  alarmed; 


v]  THE  DOUBTFUL  FUTURE  115 

When  the  war  is  over,  commercial  freedom  will 
win  in  England  just  as  political  freedom  has  won 
in  Russia,  and  we  shall  be  quite  content  to  leave 
the  bureaucrats  and  the  Romanoffs  to  cultivate 
their  roses  Ibgether  in  some  suitable  rural  atmos- 
phere." 

But  with  taxation  what  it  will  have  to  be,  all  is 
fish  that  comes  into  the  net,  and  if  the  State  can 
learn  to  produce  and  distribute  better  and  more 
profitably  than  private  enterprise,  no  prejudice 
should  stand  in  its  way.  But  it  ought  to  win  its 
spurs,  if  it  can,  in  a  fair  field  and  not  with  the 
support  of  privileges  and  monopolies  and  subsidies, 
still  less  with  the  help  of  tariffs. 

Apart  from  this  possible  source  of  revenue,  con- 
cerning which  one  is  justified  in  doubting  whether 
it  will  ever  be  realized  and  in  feeling  sure  that  in 
any  case  it  will  be  slow  in  growth,  taxation  is  the 
means  by  which  the  State  will  have  to  divert  from 
our  use  so  much  of  our  annual  output  of  stuff  and 
work  that  has  to  be  devoted  to  national  purposes. 
As  to  the  extent  to  which  it  can  do  this,  there  are 
conflicting  opinions.  Some  say  that,  owing  to  the 
enormous  weight  of  the  after-war  debt  charge  and 
our  impoverishment  by  war,  it  will  not,  for  years  to 
come,  be  possible  to  find  any  money,  that  is  divert 
any  part  of  our  output,  to  purposes  of  social  im- 
provement. On  the  other  hand,  there  is  the  opinion, 
which  the  huge  figures  of  our  war  spending  have 
helped  to  stimulate,  that  now  that  we  have  learnt 
to  think  in  millions  and  in  hundreds  of  millions,  the 


ii6         THE  LIMITS  OF  SPENDING     [chap. 

State  will  never  again  be  checked  by  any  considera- 
tion of  a  few  millions  more  or  less  in  the  cost  of 
any  reform  that  is  accepted  as  needing  to  be  done; 
and  that  the  reformer  will  henceforward  have  a 
bottomless  purse  to  draw  on  since  he  will  always, 
when  the  war  is  over,  be  able  to  say,  "What  I  ask 
is  only  the  cost  of  one  day,  or  one  week,  or  one 
month — as  the  case  may  be^ — of  the  late  war,  and 
just  consider  how  much  good  it  will  do!" 

As  to  the  first  and  pessimistic  view,  we  cannot 
know  how  far  it  will  be  right  until  we  know  how 
much  capital  equipment  will  have  been  impaired  and 
how  much  is  owed  to  foreign  nations  by  the  time 
the  war  is  over.  If  by  the  destruction  of  ships  and 
the  depreciation  of  industrial  plants  and  of  the  soil's 
fertility,  the  State's  output  is  seriously  diminished, 
and  if  at  the  same  time,  owing  to  borrowings  abroad 
and  sales  of  securities,  the  country  has  a  much 
smaller  sum  to  receive  every  year  on  balance  from 
foreigners  in  interest,  which  comes  in  the  form  of 
imported  goods ;  then  the  total  income,  in  the  shape 
of  goods  produced  at  home  and  received  from 
abroad,  will  be  less,  and  any  part  of  it  diverted  to 
national  needs  will  involve  a  greater  sacrifice  than 
before.  In  so  far  as  it  is  held  at  home  debt  involves 
no  absorption  of  the  national  output,  but  only  a 
transfer  of  part  of  it,  by  taxation,  to  the  use  of 
certain  members  of  the  nation  who  hold  the  debt. 
It  is  therefore  only  necessary  to  be  sure  that  the 
taxation  involved  by  it  is  imposed  on  the  people  who 
ought  to  have  subscribed  to  the  loans.    Then  those 


V]       THE  IMPORTANCE  OF  TEMPER     117 

who  did  their  duty  in  subscribing  will  get  their  taxes 
back,  those  who  pinched  themselves  and  did  more 
than  their  duty  will  get  more  than  their  taxes  back, 
and  those  who  did  not  do  their  duty  will  get  nothing 
back,  which  is  just  as  it  should  be.  This  arrange- 
ment is  easier  to  describe  as  desirable  than  to  put 
into  practice,  which  is  one  of  the  objections  to 
finance  by  borrowing. 

But  even  if  the  State's  total  income,  in  goods  pro- 
duced at  home  and  by  its  debtors  abroad,  is  ma- 
terially less,  which  has  yet  to  be  proved,  it  does  not 
follow  that  the  amount  of  it  available  for  national 
purposes  will  be  less  if  we  are  resolved  to  make  a 
greater  sacrifice  for  them.  Everything  will  depend 
on  the  temper  and  state  of  mind  with  which  we  set 
to  work  and  turn  out  goods  in  the  first  place,  and 
in  the  second,  regard  the  claim  on  our  work  that 
the  State  may  make  for  purposes  of  national  de- 
velopment and  improvement,  such  as  health,  educa- 
tion, housing,  and  the  dozens  of  other  things  that, 
in  the  opinion  of  some,  need  to  have  work  put  into 
them.  If  we  go  to  work  in  a  bad  temper  and  have 
strikes,  lock-outs,  and  quarrels  about  methods  of 
production  and  distribution  of  the  output,  then  it  is 
likely  that  our  output  will  give  us  little  chance  of 
drawing  on  it  for  social  reform.  And  there  is  also 
another  enormous  question  to  be  answered.  Shall 
we  have  to  spend  in  future  a  much  greater  amount 
on  defense,  or  will  swords  be  hammered  into  plow- 
shares ?  The  hope,  which  was  so  strong  in  the  early 
days  of  the  war,  of  secure  peace  and  freedom  from 


ii8         THE  LIMITS  OF  SPENDING     [chap. 

the  burden  of  armaments  has  lately  looked  sickly, 
but  the  intervention  of  the  United  States  has  cer- 
tainly revived  it,  and  it  seems  now  at  least  possible 
that  the  League  of  Honor  may  ripen  into  a  League 
of  Peace  that  will  rid  mankind  of  war's  nightmare. 
These  considerations  apply  also  to  the  optimistic 
view  which  holds  that  we  shall  never  again  be 
stopped  by  lack  of  money.     It  is  only  true  if  the 
taxpayers  are  persuaded  that  the  objects  for  which 
they  are  asked  to  make  sacrifices  are  a  national  need 
and  ought  to  be  paid  for  out  of  the  national  purse. 
If  a  people  makes  up  its  mind  that  a  thing  is  worth 
paying  for,  it  can  and  will  pay  for  it,  up  to  the 
extent  of  half  its  income  and  more,  as  the  war  has 
shown.     But  this  cannot  be  done  if  the  burden  of 
taxation  is  unfairly  imposed,  or  if  a  considerable 
minority — especially  if  they  are  those  who  are  asked 
to  pay  most — are  opposed  to  the  objects  for  which 
taxation  is  raised.     "Taxing  the  rich"  looks  easy, 
but  it  cannot  be  done  indefinitely  unless  the  rich 
pay  willingly.    The  taxpayer's  power  to  strike,  re- 
ferred to  in  Chapter  I,  is  still  a  real  one.     If  the 
rate  of  taxation  takes  more  from  the  producer  and 
from  the  owner  of  accumulated  or  inherited  wealth 
than  they  believe  to  be  just,  then  the  incentive  to 
production  and  accumulation  will  be  checked,  and 
the  tree  which  bears  the  plums  will  have  been  killed, 
or  weakened  in  its  fruitfulness.     For  national  de- 
fense every  one  is  ready  to  have  his  money  taken, 
and  in  war-time  there  is  much  less  tendency  than 
usual  to  grumble  about  the  manner  in  which  the 


V]  NO  SHORT  CUTS  119 

money  is  raised.  For  national  improvement  and 
for  what  Mr.  Lloyd  George  once  called  a  "War 
Budget  against  poverty  and  squalidness"  there  may 
some  day  be  the  same  cheerfulness  and  readiness  on 
the  part  of  those  who  pay.  It  may  be  that  war  will 
have  taught  them  this  lesson.  If  so,  in  spite  of 
all  its  horrors,  the  war  will  have  opened  the  way  to 
a  great  stride  forward  along  the  road  of  progress. 
But  there  are  no  short-cuts  on  this  road,  and  only 
by  the  education  of  the  individual  to  a  just  view 
of  his  duty  as  a  producer  and  worker,  and  of  the 
claim  of  the  State  upon  his  product  for  national 
needs,  can  full  use  be  made  of  wealth  for  purposes 
worthy  of  any  nation  that  intends  to  be  a  leader  in 
human  progress. 


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'IVEP     "T-     -"       -ALIFOPNTA  AT       OS  ANGELES 


I'jkMYERSlTY  OF  CALdFOpjIA 
lOS  AKGELKS 


HJ 

2306 

W77o 


Withers  - 
Our  money 
and  the 
state. 


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ovEhtDUE 


HJ 

2306 

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